奧馳亞 (MO) 2006 Q2 法說會逐字稿

Good morning and welcome to Altria Group's second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

I'll now turn the call over to Mr. Nick Rolli., Vice President of Industrial 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 audo -- audio webcast we are providing summary slides of second quarter results for Philip Morris USA, Philip Morris International and Kraft Foods.

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

Kraft Foods reported its second quarter 2006 results yesterday and hosted a separate webcast, and since the food business was covered in detail on that webcast, our discussion of Kraft this morning 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 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 second quarter, followed by your questions.

For 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 Dinny.

Thank you, Nick, and good morning, everyone.

In the second quarter all our businesses delivered solid performances.

PM USA continued to increase its market share, driven by gains of Marlboro and Parliament.

Philip Morris International achieved strong share gains in France, Germany and Italy, and benefited from acquisitions.

Kraft Foods continued its progress by generating good top-line growth and solid income performance.

Altria's reported diluted earnings per share from continuing operations were down 7.9%, but adjusted for one-time tax benefits and other items as shown on page 2 of our news release, EPS was up 6.8% to $1.41 from $1.32, more accurately reflecting the underlying strength of our businesses.

We raised our previously-announced projection for 2006 full-year diluted earnings per share from continuing operations by $0.15 to a range of $5.40 to $5.50.

This change reflects Kraft's anticipated gain on the redemption of its interest in United Biscuits, benefiting Altria by approximately $0.09 per share, Kraft's forecast for lower-than-expected restructuring charges for the full year from unfavorable impact of $0.36 in previous guidance to the current $0.28 per share and a charge of $0.03 per share for Philip Morris capital corp's exposure to the airline industry.

While exchange rates have moved favorably since the first quarter of 2006, we are not updating our currency guidance at this time because of the heightened uncertainty relating to various developments around the world and their potential impact on the relative value of the dollar.

Nevertheless, if rates hold at today's levels, we could benefit by between $0.04 and $0.06 per share.

On the other hand, I should also point out that our tax rate for 2006 might be slightly higher than we originally estimated and this may negate the potential currency favorability.

Turning to domestic tobacco, Philip Morris USA had another successful quarter, characterized by solid income and strong retail share growth.

Operating Company's income rose 3.2% to $1.3 billion, primarily driven by lower wholesale and retail promotional allowance rates, partially offset by lower volume.

Cigarette shipment volume of 47.2 billion units was down 4.3% from the previous years due to changes in wholesale and retail inventory levels and the timing of Fourth of July trade purchases versus the prior year.

Adjusting for those factors, PM USA estimates that shipment volume declined approximately 2% in the second quarter of 2006 versus the year-ago quarter.

In the quarter, retail share advanced 0.5 points to 50.5%, driven by Marlboro and Parliament as measured by IRI/Capstone Total Retail Panel.

Marlboro achieved a 40.6 market share, up zero points, six points versus prior-year quarter.

Importantly, Marlboro's price gap with the lowest-price brand was essentially stable at approximately 46%.

Parliament's market share of 1.9% rose 0.2 points versus prior-year quarter.

PM USA's share of the premium category increased 0.1 point to 62.1%, while its share of discount category grew 0.3 share points to 16.7%.

Within the discount category share of the deep-discount segment, which includes both major manufacturers' private-label brands and all other manufacturers' discount brands, continued to decline, down 0.5 points to 11.3%.

This is the lowest quarterly share since the second quarter of 2002.

As mentioned in our news release, Philip Morris USA began test marketing a smoke-free and spit-free tobacco pouch product called Taboka earlier this month in the Indianapolis area, in order to evaluate adult smoker acceptance of this new product.

It is too early to give you any indication of how it is doing.

Overall, Philip Morris USA enters the second half of the year with continued retail share momentum and is on track to deliver moderate retail share growth and operating Companies income growth in the mid single-digits for the full-year 2006.

Turning to our international tobacco business, in the second quarter PMI's operating Company's income was up 5.7% to $2.1 billion, due primarily to higher pricing and the favorable impact of acquisitions of $81 million, partially offset by a negative currency impact of $68 million.

Excluding unfavorable currency, PMI's operating Company's income was up 8.9% versus the second quarter of 2005.

Absent unfavorable currency and acquisitions, PMI's OCI was up 4.9%, a solid performance in the face of PMI's challenges in Spain.

Cigarette shipment volume increased 5.7% to 213.9 billion units, driven by recent acquisitions in Indonesia and Columbia, favorable timing of shipments in Italy, as well as gains in France, Poland, Argentina, Ukraine and worldwide duty free.

These increases were partially offset, primarily by lower volume in Spain and Portugal and the unfavorable timing of shipments in Russia and Japan.

Excluding acquisitions, PMI cigarette shipment volume was up 0.8% in the second quarter.

PMI's total tobacco volume, including 2.2 billion cigarette equivalent units of other tobacco products, grew 6% in the second quarter to 216.1 billion units.

Turning to a brief review of PMI's results from a regional perspective.

In the European Union region, PMI's cigarette shipments were up 0.8%, as gains in France and Poland and the favorable timing of shipments in Italy were largely offset by declines in Spain and Germany and Portugal.

PMI's cigarette market share in the European Union was 39.3%, down 0.2 points versus prior-year quarter, primarily reflecting Spain, while its share of total tobacco consumption, which includes cigarettes and other tobacco products, in the EU was 35.4%, an increase of 0.4 points.

In Spain, the total cigarette market declined 2.5%, which was essentially flat when adjusted for two less selling days in the second quarter of 2006.

This performance reflects some recovery after the first quarter impact of the new tobacco law implemented on January 1st of this year.

PMI's shipments in Spain were down 14.2% and market share, compared to the prior-year quarter, was down three points to 31.6%.

However, PMI's sequential market share, at approximately 32%, has been resilient over the past three quarters.

In Spain, Marlboro's share of 16.7% in the second quarter was down 0.3 points, but it was Chesterfield and L&M in the medium and low-priced categories that accounted for most of PMI's market share loss compared to last year's second quarter.

Their share declines reflects the repositioning of premium and mid-priced competitive brands to the low-priced segment, and the availability of competitive brands in the super-low segment priced at a euro 1.85 per pack of 20 cigarettes.

In this challenging environment, PMI continues to advocate an increase in the level of minimum excise tax in Spain to address the issue of very low price offerings.

While PMI's sequential market share trend in Spain is encouraging, recovery towards previous profitability levels will take time, and we believe that PMI's superb brand portfolio will, over time, steadily regain market share losses.

In Germany, we're very pleased with PMI's market share performance, which was up in the second quarter on both a sequential and year-over-year basis.

Share of total tobacco consumption rose two points to 30.8%, representing sequential share growth for the third consecutive quarter.

PMI's cigarette market share in Germany of 37.6% grew 0.7 points versus the prior-year quarter, driven by the growth of L&M.

In addition, PMI's share of total tobacco portions advanced 11 points versus the prior year to 25.1%.

Recall that, as of April 1, 2006, tobacco portions in Germany can no longer be manufactured with favorable tax treatment.

However, the retail availability of tobacco portions is expected to remain in the German market through the third quarter of this year.

Overall, 2006 is essentially a transition year for PMI in Germany, as the market for tobacco portions gradually ends, resulting in improved cigarette volume.

PMI is actively reinforcing Marlboro with line extension and unique marketing and promotional activities to drive future volume and share growth.

It has also successfully positioned L&M at a competitive price.

In Italy, the total cigarette market declined 1.5%, primarily reflecting two less selling days versus the prior-year quarter.

PMI's reported shipment volume was up 19.8%, helped by the favorable timing of shipments, and market share rose 0.9 points to 53.6%.

Marlboro grew 0.5 points to 22.8% in the second quarter, and market share gains were also recorded by Chesterfield, Merit and the Philip Morris brand.

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

Cigarette shipments rose nearly 11% and share grew 1.1 point to 42.8%, driven by the continued success of Marlboro and the Philip Morris brand.

Moving on to Eastern Europe, Middle East and Africa, shipments grew 0.6%, due mainly to continued gains in Ukraine and several North African markets, largely offset by lower shipments in Turkey and Russia.

In Russia shipments were down 2.1% due to timing, while share was down 0.4 points to 26.6%.

Importantly, consumers in Russia continue to trade up to PMI's premium brands.

In market sales in Russia for our higher margin offerings, which include Marlboro, Parliament and Virginia Slims, were up a combined 10.3% in the second quarter.

In Turkey, PMI shipments declined 4.3%, mainly due to low-price Bond Street.

However, market share grew 2.1 point to 42.6%, behind the strong performance of Lark.

In the Ukraine, shipments increased and share rose 0.6 points to 32.7%, fueled by the continued growth of Marlboro and Chesterfield.

Turning to Asia, volume increase 20.5% reflecting the acquisition of Sampoerna Indonesia.

Excluding the Sampoerna volume, shipment in Asia were down 2.4% due primely to a difficult comparison with the prior-year quarter in Japan.

In Japan, the total market grew 13.8% in the second quarter, reflecting trade purchasing ahead of a tax-driven price increase on July 1, 2006.

PMI shipments were down 1.1 billion units because last year's second quarter benefited from the inventory build in advance of the Marlboro license return, partially offset by higher in-market sales of 12.7% in the second quarter of 2006, ahead of the tax increase.

PMI's market share of 24.4% was down 0.2 points.

Importantly, Marlboro's share in Japan was up 0.2 points to 9.8% behind the success of Marlboro Ultra Lights Menthol.

Effective July 1, 2006, PMI passed on the tax increase in Japan of 20 yen per pack and it took additional ten yen a pack on approximately 35% of its portfolio.

Overall, PMI's portfolio in Japan should be enhanced by these pricing moves in this highly important market.

Looking forward, we expect second half industry volume in Japan to be down approximately 15% compared to the same period last year, reflecting preprice increase trade purchasing in the second quarter and the impact of the July 1st price increase.

PMI's in-market sales will also be down, although more modestly, and the shipment volume -- and shipment volume will decline at a lower rate than experienced in the first half of this year.

In Indonesia results are strong in the second quarter, with key brands [A Ajou], A Mild, Dji Sam Soe and Marlboro, all performing well.

Market share for PMI's portfolio in Indonesia was 27.5%, up 1.9 points on a pro forma basis versus the prior-year quarter.

Turning to Latin America, PMI shipments were up 10.1%, driven by gains in Argentina and Mexico, and acquisition of Coltabaco in Columbia.

Excluding Coltabaco, shipments grew 6%.

In Argentina, shipment growth and market share gains were robust, driven by the price repositioning of the Philip Morris brand and recent launch of Next.

In Mexico, shipments rose 3.2% and market share was up 0.5 points to 62.8%, due to the continued momentum of Marlboro and Benson and Hedges.

Total Marlboro shipments in the quarter were down 2%, due mainly to the shipments in Japan and declines in Germany and Argentina, partially offset by the favorable timing by shipments in Italy and solid gains in France, Korea, Romania, Russia, Ukraine and worldwide duty-free.

Absent the timing factors in Japan and Italy, Marlboro cigarette shipments were essentially flat in the second quarter versus the same period a year ago.

Importantly, Marlboro achieved solid share gains in many top-,income markets as mention in our news release.

In addition, PMI continues to broaden Marlboro's portfolio with the recent introduction of Marlboro's Wides in Portugal, France and Spain.

By the end of this year, Marlboro Wides will be launched in a number of other PMI markets.

To sum up on PMI, we remain confident in the long-term growth potential of our international tobacco business.

We are particularly encouraged that the rates of decline in the EU cigarette industry, as well as PMI's in-market sales in that region, have been moderating over the last three years.

PMI continues to project approximately 4% to 5% volume growth and organic volume growth of about 1% in 2006, despite the challenges in Spain.

On a constant currency basis, operating Company's income is forecast to increase in the mid single-digit range.

Let me now turn to our food business.

Kraft reported its results yesterday.

Net revenues were up 3.4% to $8.6 billion, reflecting positive product mix, the impact of price increases and gains in Eastern Europe and Latin America, as well as solid growth in North America, partially offset by the impact of divestitures, as well as unfavorable currency of $32 million.

Organic growth revenues rose 4.9% in the second quarter.

Kraft's ongoing volume growth of 0.9% included gains in cheese, meats and coffee.

Volume growth also included an estimated one percentage point benefit from the shifting timing of Easter shipments versus last year.

In addition, the impact of product item pruning and the discontinuation of select product lines represented approximately 2% of prior-year volume.

Kraft's operating income decreased 5.8% to $1.2 billion for the second quarter, due to higher asset impairment, exit and implementation costs.

However, excluding those costs and gains losses on the sales of businesses, operating income increased 9.3% and operating income margin increased to 16.6% from 15.7%.

To conclude, Altria's fundamentals continue to be strong in the second quarter, with good volume, share and income performance across our tobacco and food businesses.

Thank you.

I will now be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Chris Growe of A.G. Edwards.

Please go ahead.

Good morning, Dinny.

Good morning, Chris.

I just have a couple questions for you.

To lead off, you made some, I think, some helpful comments around the earnings guidance.

But with the upside coming through with Kraft with, I calculate, a little higher -- a little bit more of a benefit from -- I'm sorry, a little less of a negative from currency and what seems to be some improved conditions in Spain, I'm surprised that the guidance didn't go much higher.

Is there an expectation for more aggressive reinvestment back in the business and, if so, is that PM USA, PMI?

I'm just curious as to kind of your thinking on that.

No, I think the situation is -- in Spain is largely unchanged, Chris, from our earlier guidance, and the same is true for Kraft.

And, you know, as we said earlier in our -- in my prepared remarks, except for the three items, which are reported items, i.e., the UB gain, the Kraft -- the lower Kraft restructuring, and the higher allowance for the airline industry, besides those our guidance is unchanged.

You're right, currency could be favorable approximately $0.04 to $0.06, although the situation out there is pretty uncertain in terms of things around the world, and so we'd rather stay prudent there.

And then as I said, it could be the offset with higher tax rate.

So, we really are very comfortable holding our guidance in this range of $5.40 to $5.50.

Okay, and then if I could ask a question on Spain.

Is there an expectation for another increase in the minimum reference price.

If I recall, there was something following the -- I think it was after June 30th they were going to consider that minimum reference price.

Is that still the case, as far as you know?

Well, it's certainly an expectation and we hope that it'll come through, but, you know it's up to the government of Spain.

They've got to make the decision, so we'll just have to wait and see.

Okay.

And my last question is on PM USA and basically your outlook for the division, in light of what seems to be a little more of an aggressive or a little more of a volume decline this quarter, is that perhaps fuel price related?

And I know there's a number of large excise tax increases, at least in place or perhaps going to be in place.

Are you a little more cautious on the outlook there for PM USA for the second half and into'07.

The decline in the second quarter -- you know, as I said, the adjusted decline was about 2% and the state excise taxes this year are actually fairly benign.

The problem, of course, with state excise taxes is going to be next year, when we expect the effective increases in Texas to go through.

And then there are a number of ballot initiatives, including California, which we'll find out about in November.

And, you know, we hope that doesn't go through, but if that does go through, that could have quite a significant impact on state excise taxes and, therefore, the price of cigarettes in 2007.

Okay.

Was there any fuel price hit, as you see it, to even your underlying volume this quarter?

The only thing we're noticing is that there are lower retail inventories at certain outlets because of the higher prices of fuel.

Okay.

Thank you.

Thank you.

Our next question is from David Adelman from Morgan Stanley.

Please go ahead.

Good morning, Dinny.

Hi, David.

Dinny, I'm curious.

Following the Florida Supreme Court's Engel ruling, is there anything incremental you can tell us about the anticipated timing of a Kraft spin-off?

David, as a matter of course we do not discuss litigation issues on these calls.

However, I'll make this one statement, and then I'm not going to answer any more questions regarding this matter.

I just say I repeat that we're fully committed to the restructuring of the Company.

And although the Engel verdict removes one major roadblock, as Louie Camilleri, our Chairman and CEO, has said, the board of directors will take into account the litigation landscape, including the DOJ case, before making its decision.

And that's all I can say at this stage, David, and in fact, I'm not going to take any more questions on this.

Okay.

Secondly, Dinny, the press release references concern about the global economy;

Louie has a quote referencing this.

And I'm just curious, at this point in time, is that evident in any of the major business units in any of the major markets?

Or is that more of a cautionary comment, going forward.

It is a cautionary comment, going forward.

Okay.

Thirdly, the tobacco portion volume in Germany being down during the second quarter, is that an evidence of certain brands and certain manufacturers starting to deplete their stocks?

Yes.

Actually what happened is that the volume of tobacco portions fell about 1.8 billion units in the second quarter compared to the first quarter, and that actually reflected depletion of private-label tobacco portions.

And we're finding that most of those smokers -- smokers who are smoking the private-label, tobacco portions, are moving to make-your-own and roll-your-own products, as well as Cigarellos.

So for example, we found that, in the second quarter of this year, that the share of fine-cut, which is running at about 13.5% of total consumption, is now up to 15.5% of total consumption.

And filter Cigarellos are also growing fairly rapidly and have increased their share from 2% in the first quarter to about 2.5% in the second quarter.

Okay, and then two other quick things, Dinny.

I think in the first quarter, Spain was 400 basis point drag on the rate of operating profit growth.

Was that a similar adverse impact in the second quarter?

Yes, about the same, David.

Lastly, Dinny, can you comment on the pace of your retail market growth share in Japan?

If you went back several years ago, you used to gain share in that market, perhaps 100 basis points a year, and that's slowed over time, and in this quarter, as well.

I'm just curious, you know, on your observations on what's happening in that market and with the Marlboro take-back, you're gaining share, but are there realistic opportunities to accelerate pace of share growth?

Yes, I think there are, David.

Actually, if you look at the history in Japan, there have been periods when we've grown faster and there have been periods where we've grown slower, and it's got a lot to do with the, you know, timing of introduction of new brands, relative to competition.

And, you know, I think we're at -- we're at one of those sort of parts of the cycle where our share growth is not as strong as we'd like it to be.

But we're getting ready in Japan with some interesting initiatives, and I think you'll see in the next few quarters our market share growing.

And I'm pretty confident that, for the year, our share is going to be ahead of 2005.

Sure.

Okay.

Thank you very much.

Thanks, David.

Our next question is from Bonnie Herzog of Citigroup.

Please go ahead.

Thank you.

Good morning, Dinny.

Hi, Bonnie.

Hi.

I just had a couple of questions on the U.S. business and then maybe a couple on your international business.

First, is there -- or can you share with us any feedback you've received on the launch of Tabaka - it's hard for me to pronounce that -- in your test market?

And then, how are you merchandising this product in the stores?

And I'm curious to know if you have any deadline as to when you might make a decision to potentially launch the product nationally?

And what is the status of your moist smokeless organic interaction?

Taboka.

Yes, thank you.

It's been -- it's actually been too recently launched, Bonnie, for us to make any prediction.

It is being merchandised in the cigarette section of the counter, and we make -- this is a -- like in any test market, it's an opportunity to learn, to see how consumers react to this, how they like the taste, et cetera.

And we're going to study it, and at an appropriate time we'll make a decision whether to take it to, you know, other test markets or whether to spread it regionally or nationally.

But we -- it's too far away from that point.

What is the third part of your question?

Well, the last part was I'd like to hear status of your moist smokeless organic introduction.

Sorry, I didn't hear it.

Sorry, Dinny.

The status of your moist smokeless organic introduction.

Where are you at and when can we expect to hear more about it?

We have no plans at this stage, Bonnie.

Okay.

All right.

And, again, just in terms of the test market, you're thinking six months to year when you say analyzing how -- the success of this, when you say several months away.

Correct?

That's a fair assumption.

Okay.

I'd like to ask a broader question on the U.S. business.

How do you feel about the health of the cigarette market for PM USA specifically, I guess, given the ongoing higher tax increases -- although I heard your statements about you think it's benign -- but the increased smoking ban, you know, the possible increased competition from Reynolds, and the current price gap.

Are you more concerned about top-line growth for PM USA going forward, given these issues, or are you simply planning on changing your portfolio mix, meaning shifting into other parts of the tobacco industry in effort to boost PM USA's top line?

No, I think -- look, the bulk of our business is the cigarette business, and we're doing very well in the cigarette business.

Our market share growth for the quarter was 0.5 share point.

I think that's terrific in this very highly competitive business.

Our strategies are working, and we really don't have any plan to change that strategy.

Now, as far as -- as I mentioned, the state excise taxes per pack are roughly about $0.88 on a weighted average basis at the moment.

And we expect that, for the year, they're going to come out at somewhere around $0.90 a pack.

But as I mentioned earlier, to Chris's question, next year there are potential major increases, which could affect the size of the total industry, and, therefore, PMI -- PM USA's volume.

I mean that, Dinny, with all due respect that that could continue for the next three to five years.

I mean, I don't -- or do you foresee this ever going away or the -- so the smoking bans for the most part, quite frankly, have been implemented in many of the major cities already.

Just trying to get a sense from you how you feel about the state of the business?

I know consumption has been declining for what now, 30, 35 years, and that is probably going to continue, so it makes sense you're moving into other parts of tobacco.

I think that's your strategy, even though cigarettes will always be the core.

Yes.

Is that fair?

And we've said -- we've spoken about a [JS&C] strategy in that regard.

And once again coming back to the size of the cigarette industry, it has been declining between 1% and 2%, as you say, for a long time.

The current rate of decline is sort of closer, I think, to 2%.

But I think the industry is still in pretty solid shape.

Okay.

And then just in terms of pricing, which I'm not even going to touch on, but I just want to ask about the price gap, so you're still okay with where the price gap is?

Yes, yes.

I think the price gap is just fine.

All right.

Now quickly into PMI, internationally Marlboro shipments declined 2% -- as is stated in the press release -- during the quarter, primarily due to the timing of shipments in Japan, as well as the lower volume in Germany and Argentina.

Now, excluding these issues, would Marlboro shipment volume have been up?

Yes, it would have been up slightly.

Okay.

All right.

Now, but if you think about it just being up slightly, should we think about the future of Marlboro internationally, which is such an incredible brand franchise?

Will we hear more and see more from that business, in terms of innovation to leverage the brand equity further, like Marlboro Wides, once PMI is separated or spun off?

Do you think that's when we're going to hear more news?

Are you waiting?

I think PMI, regardless of whether it's, you know, part of Altria or on its own, is always going to be have tremendous focus on Marlboro.

It's a great brand, as you say, and in fact, I was just looking at some numbers the other day.

If you look at the period 2002 to 2005, the three-year period, Marlboro's volume has declined a bit, but it's gone from 326 billion units to 322 billion units in that three-year period, and this is in a time when there've been huge reductions in the cigarette market and tremendous upheaval in some of the EU markets.

And despite that, Marlboro's performance has held pretty steady over this period.

And for a a premium brand, that's really a terrific performance.

But in my view, after also talking with Andre, I think there's just so much more potential, especially if you implement new packaging, possibly new line extensions on this brand, again to increase the visibility not -- or brand equity, to leverage that.

I think you're right, and that's what we're doing with Marlboro Wides and a number of other initiatives that we have.

And that we'll hear more about, when you say number of initiatives, we still have not heard everything, right?

Exactly.

You haven't.

Right.

Final quick question on your German business.

Your total shipment volume was up and you're taking share.

And, again, I think you mentioned that it's primarily due to the strength in the portions business.

So I'm thinking about it as you look forward in the second half, what are you expecting for your business in this country?

Do you expect it to get worse, since you are no longer shipping portions, again due to the favorable tax conditions in Germany?

And then, also, where do you expect these main portions smokers to trade to, -- I think you mentioned some of them are shifting into the make-your-own, roll-your-own business -- or are you seeing them possibly shift to the deep-discount cigarette segment?

Just trying to get a feel for it.

I'm pretty confident that our share of the cigarette segment in Germany will be up against last year in the second half and of -- obviously for the full year.

As far as the portion smokers will be coming back to, you know, other tobacco products, including cigarettes in -- by the end of the third quarter.

I think we'll get more than our fair share of the bounce-back from portion.

And we want them to go back to the right type of cigarettes, correct?

Yes.

Thank you so much for your time.

Thank you.

Our next question is from Marc Greenberg of Deutsche Bank.

Please go ahead.

Good morning, Dinny.

My question relates to the use of capital.

In the past you indicated that there's some technical factors relating to the spin that somewhat restrict the balance sheet.

I'm wondering if you could caulk about that three ways.

First, with Kraft completing the United Biscuits transaction this week, is Kraft's book value at the point where we might see a new and different level of activity at Kraft?

Second, can you talk about your Altria Corp availability for outside resources of capital, things, things like paper, in light of the favorable outcome in the price case?

And finally, any update that you might provide on the resumption of share repurchase would be very helpful.

Thank you.

Well, Marc, for the foreseeable future, really, I can't see much change in capital structure.

As far as share buy-backs are concerned, we've sort of consistently said over the past many quarters that we have no plan to buy back shares.

And, in fact, our guidance, you know, obviously doesn't include any share buy-back.

I don't think the -- the UB acquisition at Kraft, it has any direct impact with regard to their capital structure.

So I think my answer to your question is that really there is no change for the foreseeable future in terms of capital structure.

Thank you.

Okay.

Our next question is from Judy Hong from Goldman Sachs.

Please go ahead.

Hi, Dinny.

Hi, Judy and congratulations.

Thank you.

This first question of PMI, if I look at the operating profit acquisition and constant currency basis, it was up 4.9%, with volume being up .8%, if you take out acquisitions, which seems that you've got pretty good -- you've gotten pretty good operating leverage in the second quarter versus the first quarter.

Can you just talk about the factors which drove that in the second quarter?

Well, I think the major factor that drove that in the second quarter is that we did better in the EU, compared to the first quarter.

I think that would be the major driving factor.

That wasn't coming from Spain, though, is that correct?

Because I think you said Spain for the full year, the outlook remains largely unchanged?

Yes, it came from most of the other EU markets, despite Spain falling.

Okay, so basically you've gotten better geographic mix in the second quarter versus the first quarter?

That's right.

Okay.

The second questions, just looking at Russia, I think this is the second quarter in a row where volume was weak, and I think you mentioned in the press release that it was somewhat related to the inventory situation there.

Can you just give us a little bit more color in terms of what's going on in that market, both related to the trade inventory movement as well as at the consumer level?

Yes.

Actually you're right.

Shipments were down 2.1%.

But if you looked at in-market sales in the second quarter, they were up 3%.

And market share was down 0.4 points to 26.6%, but this was due to losses we had in our lower-margin products, particularly Apollo Soyuz and our Optima, which are at the lowest end of the market, and we also had a loss -- small market share loss with L&M.

But our premium and medium-priced products, including Chesterfield, Parliament and Marlboro and Virginia Slims, are all doing well and all growing.

So we're improving our mix in Russia, but we're losing share because we have this pretty big tail of local, low-priced brands, where the price competition is very significant.

Okay.

And then just a final question of PM USA, if you look at your overall market share -- in looking at the retail data, your overall market share is up about 0.5 points.

But within the premium segment I think your share is up only 0.1 point in the second quarter.

Can you just talk about how we should think about your overall market share versus just looking at your share of the premium segments?

Is this 0.1 share point gain in the premium segment concerning?

Would you like to see stronger share growth within the premium segment?

Well, we'd like to see stronger share growth within the premium segment.

You have to remember that the -- all the competition is in the premium segment, and if you look at our two main competitors, they're both concentrating on the premium segment.

That's where most of the promotion is.

That's where most of the selling efforts are.

And to eke out a 0.1 share, when we already have 62% of that segment, is pretty good.

Okay.

Thanks, Dinny.

Okay.

Thanks, Judy.

Our next question is from Christine Farkas of Merrill Lynch.

Please go ahead.

Thank you very much.

Good morning, Dinny.

Hi, Christine.

Back to your comments, I guess, in your press release about the concerning global economic outlook.

Was this really in reference to your outlook for potential currencies, because we're not seeing lot of down-trading in your emerging markets.

So I'm just wondering if you could perhaps clarify why that outlook is a concern and how that would impact your view of PMI or, potentially, PM USA?

Well, you know, clearly all one reads today, based on what, you know, everyone is reading today, the situation around the world is pretty unsettled in some parts of the world, politically, and economically there are issues, particularly with regard to currency in a number of emerging markets.

So that's basically what we were referring to when we talked about the global situation.

Okay.

So then, is it fair to say then, that down-trading trends in emerging markets are not all that apparent and have certainly have not worsened?

No, we didn't want to give that impression.

Okay.

Terrific.

If you can just spend a little bit of time on Turkey.

Clearly the volume comparisons are getting tougher there.

Can you talk a little bit about the product mix and perhaps the prospects for Marlboro in that market?

Yes, the situation in Turkey is that the total market has slowed down this year -- the growth of the total market has slowed down this year because we took a significant -- I mean, the industry took significant price increases last year, and that slowed down the total market.

But our market share in Turkey is growing well.

I think it was up over two share points compared to the same quarter last year.

We are very well positioned in Turkey.

We have Parliament and Marlboro in the premium-price category, and then we have Chesterfield and L&M in the mid-priced category, and then we have Lark and Bond Street in the low-priced category, so we have a terrific portfolio.

We have a market share of well over 42%, and I think the slow-down in the total market is temporary and is the result, as I said, of the price increases we took last year.

We expect the market to resume its growth, and with that will come volume increases.

Okay.

Moving on to Japan, can you just clarify, then, I guess when the year-over-year distributor pattern will normalize?

Will that be somewhere in the third quarter?

Yes, it will be in the third quarter.

Okay.

Moving on just quickly to -- well, I guess as a broader question, could you tell us, given that repayment in the quarter, what your equity value in the tobacco -- in your tobacco segment would be?

Yes, at the end of the second quarter -- at the end of the second quarter our equity -- this is Altria ex-Kraft, was $11.6 billion compared to $8.9 billion at the end of last year and $6.8 billion at the end of the second quarter last year.

Okay.

And final question.

Again I guess back to the economic outlook, certainly the premium volumes in the U.S. speak for themselves and seem to be winning share.

I guess within pockets of the U.S., are you seeing any evidence that higher energy prices or economic fears are actually impacting on the product mix or resulting in some down-trading, perhaps in the collective states?

We're not seeing any evidence of that, Christine.

I'm not saying that that may not be happening in certain parts of the United States, but my knowledge is not that comprehensive to be able to give you that kind of detail.

But I'd say, overall, the mix is not being affected.

In fact, the premium segment is continuing to grow and the discount segment is declining.

All right, thanks.

Thanks for that, Dinny.

Thank you, Christine.

Our next question is from Ann Gurkin from Davenport.

Please go ahead.

Good morning, Dinny.

Hi, Ann.

I want to start in Brazil where I understand your share is flat, and what is your strategy in Brazil?

Our share in Brazil is flat, you're right.

Has been flat for 35 years and our strategy is to keep plugging away.

We will certainly figure out a way of growing in Brazil.

It's not easy.

We've had, you know, a strong competitor there entrenched for many years.

And all I can tell you is we've got the patience, we've got the resilience and we've got the resources to just continue.

Okay.

Switching to Germany and the other tobacco segments.

Will we see you'll step-up innovation in products for that segment or will you acquire brands to move into that segment?

Are you happy with the your mix of your portfolio right now in Germany?

We're happy with our mix of our portfolio in Germany.

We're well represented, obviously.

We've got a good lock on the premium segment and we've now got a competitive brand with L&M in the - -in the lower-priced segment, so I think we're positioned in Germany.

Okay.

And then I saw a news story that British supermarket, [Azahazray], in September is going to implement a minimum purchase age of 18 years, which is greater than the UK of 16.

Is this going to be a movement -- just a one-time scenario or you think this is going to be a movement to raise the minimum purchase for cigarettes in the UK?

Difficult to say.

At the moment I think it's one-time thing, but, you know, it could be something that could spread.

Okay.

That's great.

That's all I have.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Rob Campagnino of Prudential Equity Group.

Please go ahead.

Again I'm with the media, but that's okay.

I'm going to buck the trend here and just ask one question and, Dinny, I was hoping you could provide us with some commentary on the Kraft board's decision to replace Roger with Irene?

Well, first of all, let me start off by saying that, as you heard yesterday, Rob, Kraft had a pretty good quarter.

They've got good mix improvement and this is very encouraging, because good mix drives the bottom line.

And as we've seen in the second quarter, Kraft income operations has grown well, and we're cautiously optimistic that this trend has continued.

We think Irene is the perfect person to take Kraft forward at this time.

She's delighted to be back at a Company which she knows very well, both in terms of its people and its products, and we're delighted to have her back.

And I think she's going to do a terrific job of taking Kraft forward.

Okay.

Then I want one more question, just as a follow-up.

What do you see as her strengths versus the job Roger had done over the past several years?

I'm not going to compare her to anyone.

All I'll say is that she knows the business extremely well, particularly obviously domestic business and she's a terrific marketing person, and she's got terrific people skills, so a combination of all those factors I think should make her very successful.

I would tend to agree with that.

Thanks for your time this morning, Dinny.

Thanks, Rob.

Our next question is coming from Chris Bird from Bloomburg News.

Please go ahead.

Chris?

Yes, can you hear me?

Yes.

Okay.

Thank you very much.

How did -- can you give me the average price for -- in the second quarter for your cigarettes and how much was that up from a year earlier?

The price of Marlboro -- weighted average price of Marlboro in the second quarter was $3.92, and compared to the last year I think we were at about $3.72.

So it was up about $0.20 a pack.

Thanks very much.

Okay.

Our next question comes from Eric Bloomquist from JPMorgan.

Please go ahead.

Hi, Eric.

Hi, Dinny.

I wanted to follow up on what is happening in Argentina.

I was wondering if you could provide more color on that.

It looks like it has been terrific volume growth, but it looks like a lot of that is coming from the low end, with the price repositioning of Philip Morris.

Can you -- is that volume growth profitable?

And are we going to continue to see the market down-trade there or is that something that we should expect will be stabilizing as we go forward?

The situation in Argentina, actually, was last year this ultra low-priced segment from local manufacturers increased significantly, and as a result, both [BAT] and our sales entered the ultra low-price segment, and our brand in that segment is next and it's done very well.

At the same time, we did lower the price of Philip Morris and that has gained significant volume.

You know, going forward, we'll just have to wait and see how things shake out there, but I think we're going to see some more stability going forward.

And is there the possibility of implementation of something like a minimum collectible tax or a minimum reference price in Argentina that would help stabilize the situation similar to what happened in Spain?

Yes, hopefully that's going to happen.

And timing on that?

Not clear.

Okay.

Thank you.

Thank you.

Our next question is from [Ursula Morane] of Bear, Stearns Asset Management.

Thanks.

I think earlier in the call you mentioned that the energy price increases had led to lower retail inventories in certain places and I wondered if you could comment further on that?

And your outlook in the second half or any changes we might need to be prepared for?

Well, I think what happened is, with energy prices going up -- with gasoline prices going up, especially if you look at retail outlets, gasoline outlets, since they've got to spend more on their gasoline inventories, they're cutting down -- I mean, they sort of limited working capital resources, so they're cutting down on the inventories of all other products, including cigarettes, and that's what I was referring to when I mentioned this point earlier.

Going forward, once you have that one-time inventory correction, I don't think you're going to get a further correction, because they're already at pretty low levels, so I think going forward you're not going to have that problem.

And you wouldn't expect it would spread beyond the gas stations?

I don't think, so because non-gas stations don't carry gas.

Right.

But their energy costs are up overall on other items, and they could also --

Yes, but that impact I don't think is that significant.

Okay.

Fair enough.

Thanks.

Thanks.

Thank you.

I'd now like to turn the floor back over to Nick Rolli for any closing comments.

Okay.

I want to thank you for joining us on this call this morning, and appreciate you being with us and look forward to talking with you again next quarter.

As I said earlier, if you didn't get a copy of the release, please go to our website at altria.com to get a copy.

Thank you all for joining us and have a great day.

Thank you.

This concludes today's conference call.

You may now disconnect.