奧馳亞 (MO) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to Altria Group's third quarter 2006 earnings conference call.

Today's call is scheduled to last about 1 hour, including remarks by Altria Management and a question-and-answer session. [OPERATOR INSTRUCTIONS] Media representatives on the call today will also be able to ask questions following the conclusion of questions from the investment community.

I'd now 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 afternoon, 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 third quarter results for Philip Morris USA, Philip Morris International and Kraft Foods.

Kraft Foods reported it's third quarter 2006 results on Monday and hosted a separate Webcast.

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

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, Louis Camilleri, Altria's Chairman and CEO, is joining us on this call.

Following remarks by Dinny Divitre, our Senior Vice President and Chief Financial Officer, both will be available to take your questions on today's earnings and Board announcements.

And as you know, both releases are available on our website at Altria.Com.

And now it's my pleasure to introduce Dinny.

Thank you, Nick and good afternoon, everyone.

Today, the Altria Board of Directors issued a statement regarding the envisaged Kraft spin-off.

The announcement provides clarity on the Board's future intentions.

I would also like to mention yesterday's upgrade by Moody's Investor Service of the long-term senior unsecured debt rating of Altria Group, Inc. to BAA-1 from BAA-2, and its affirmation of the Company's short-term commercial paper rating of prime 2.

We are very pleased with this favorable development.

Turning to third quarter earnings, Altria's diluted earnings per share adjusted for the one-time items shown on page 2 of our news release, were up 1.5% to $1.39, and we remain on track to meet our earnings target for the full year.

We project 2006 full year diluted earnings per share from continuing operations in a range of $5.48 to $5.53 versus the previously disclosed range of $5.40 to $5.50.

The Company's revised forecast includes 2 new items which together, reflect a net increase to our EPS forecast of $0.04, Kraft's gain on the Minute Rice sale of approximately $0.07, and Kraft's gain on the redemption of its interest in United Biscuits of approximately $0.06 versus our previous guidance of $0.09.

It does not include the impact of any potential future acquisitions or divestitures.

Turning to Domestic Tobacco, Philip Morris USA continued to deliver strong share performance, driven by Marlboro.

Operating companies income rose 5.7% to $1.3 billion, primarily driven by lower wholesale promotional allowance rates, and a favorable comparison with items in the third quarter of 2005.

These were partially offset by lower volume and spending of approximately $24 million for various ballot initiatives, mainly in California.

Excluding all one-time items, OCI was up 1.3%.

Cigarette shipment volume of 47.6 billion units was down 0.6% from the previous year, reflecting changes in wholesale and retail trade inventory levels and the timing of Fourth of July trade purchases, and 1 less shipping day versus the year ago period.

Absent those factors, PM USA estimates that shipment volume declined approximately 2% in the third quarter, and was down approximately 1.5% for the first 9 months of 2006.

In the quarter, retail share advanced 0.3 points versus year ago to 50.4% behind the continuous strength of Marlboro.

Marlboro achieved a 40.6% market share up 0.5 points versus prior year quarter.

Its price gap with the lowest price brand remains stable at approximately 45%.

PM USA's share of the premium category declined 0.1 point to 62.1%, reflecting losses in PM USA's non-focus premium brands.

The discount category declined 0.7 points to 25.7% in the third quarter, while the deep discount segment was down 0.2 points to 11.7%.

PM USA's share of the discount category was up 0.1 point to 16.3%.

For the full year 2006, PM USA is on track to deliver moderate retail share growth and operating companies income growth in the mid single-digit range.

Turning to our International Tobacco business, PMI's third quarter results were adversely impacted by the anticipated trade inventory depletion in Japan following the July 2006 price increases, and ongoing challenges in Spain.

Operating companies income was down 3.8% to $2.1 billion and down 2.3%, excluding asset impairment and exit costs.

The decline was due primarily to unfavorable volume mix in Japan and lower pricing in Spain, partially offset by higher pricing elsewhere in PMI.

Spain and Japan together contributed approximately 8 percentage points to the decline in third quarter OCI.

Cigarette shipment volume declined 0.5% to 215.9 billion units due mainly to declines in Spain, Japan, Turkey , and Romania, largely offset by gains in Italy, Poland, Russia, Ukraine, Indonesia, and Argentina.

In Spain, the total market was down 7.9% due largely to an unfavorable comparison with the prior year quarter, which benefited from trade purchases as a result of an anticipated industry price increase that did not occur.

PMI shipments were down 12.4% and market share declined 3.1 points to 32.2%, reflecting losses on L&M and Chesterfield.

Marlboro remains resilient with share down only 0.2 points.

However, sequentially, PMI's market share in Spain was up 0.6 points versus the second quarter of 2006 and share in the fourth quarter is also projected to be up.

The key challenge in Spain is that PMI's profit margin has declined, and recovery of this lost margin will take some time.

We remain cautiously optimistic that the long awaited minimum excise tax increase will be instituted in the coming months.

In Turkey, PMI shipments were down and market share declined 0.7 points to 41.9% due mainly to low price Bond Street, partially offset by gains of high margin brands Parliament and Muratti.

Profitability was nevertheless significantly higher.

Turning to Japan, PMI shipments were down 1.8 billion units or 10%, due mainly to a 23% total industry decline, partially offset by the favorable timing of shipments.

PMI's in market sales were down approximately 4.2 billion units or 22.5%, although share was up 0.1 points to 25%, driven by Marlboro.

PMI expects shipments and market share to be up in the fourth quarter in Japan.

Many major PMI markets performed strongly in the third quarter.

In Italy, the total cigarette market grew 0.7% and PMI shipments were also up.

Market share increased 1.2 points to 54.1% due mainly to Marlboro, which grew 0.5 points to 23%.

Share growth was also recorded by Diana.

In Germany, total tobacco consumption declined 9.5%, but adjusted for 1 less selling day in the quarter this year, was down 8.1%, due primarily to the decline of tobacco portions.

PMI's share of total tobacco consumption rose 2.8 points to 31.5% in the third quarter.

The total cigarette market in Germany declined 1.8% but excluding 1 less selling day, it was flat, the first time this has happened in approximately 17 quarters.

PMI shipments were down 2.2% and cigarette share declined 0.1 point to 36.5%.

Marlboro share was down 2.4 points to 27.2% reflecting continued consumer down trading to the value segment.

This share erosion was largely offset by gains of L&M, which grew 2.1 points to 2.9% in the third quarter.

As you are aware, tobacco portions in Germany are nearly out of the market, and initial indications are that most portion smokers are moving to fine cut.

With the remainder, according to published surveys by the German Cigarette Manufacturers Association, purchasing non-domestic product and to a lesser extent, domestically manufactured cigarettes.

In Poland, PMI shipments were up 7.4%.

Market share advanced 3.5 points to 40.6% behind the strong performance of Marlboro and L&M.

Share for Marlboro grew 0.5 points to 8.5%, while L&M was up 6 points to 14.4% in the third quarter.

In Russia, shipments were up 3.3% driven by Marlboro, Muratti, and Parliament, and aided by favorable timing.

Market share was down 0.5 points to 26.5%, but the loss was primarily due to low price brands and L&M.

Importantly, Russian consumers continue to trade up to the higher price segments where PMI is well represented, with a diverse portfolio led by Marlboro, Parliament, Virginia Slims, Muratti, and Chesterfield.

In Ukraine, shipments rose 8.8% and market share grew 1.2 points to 33.4%, fueled by consumer up trading to International brands.

Marlboro gained 0.7 share points in the third quarter, while Parliament and Chesterfield also continued to perform strongly.

In Indonesia, the third quarter marks the first comparable results since the acquisition in May of 2005, and the performance has been terrific on both the top and bottom line.

PMI shipments grew 9.1%, and market share rose an impressive 1.5 points to 28.2%.

PMI's strong brands, including [A Ajile], A Mild, Dji Sam Soe, and Marlboro are well positioned for future growth.

In Argentina, the total market was up 7.8% and PMI shipments grew 18.2%.

Market share advanced 5.9 points to 66.9% reflecting continued growth of the Philip Morris brand.

To sum up on PMI, for the fourth quarter 2006, PMI is expecting to deliver strong, year-over-year volume and income growth.

PMI projects full year 2006 total volume growth of approximately 3% to 4% with organic volume essentially flat.

Operating companies income is forecast to increase in the mid single-digit range on a constant currency basis.

Turning to our food business, Kraft reported its results on Monday, so let me give you a few brief financial highlights.

Net revenues were up 2.3% to $8.2 billion driven by good performance in North America and favorable currency of $125 million.

Ongoing volume declined 1.9% due primarily to product item pruning and discontinuation of select product lines.

Operating income increased 18.2% to $1.4 billion.

Excluding asset impairment, exit, and implementation costs, and gains and losses on the sale of businesses, operating income increased 5.6%, and operating income margin increased to 15.2% from 14.8%.

That concludes my prepared remarks.

And now, we will be happy to take your questions.

[OPERATOR INSTRUCTIONS] Christine Farkas, Merrill Lynch.

A question for Louis, if I might, just based on the Board's announcement and a look to the January 31st. .

Can you comment a little bit about what greater clarity you would hope to have by January 31st in making that decision ?

I'll try to elaborate to the extent I can, Christine.

I think today's announcement clearly shows to the world that the Board is comfortable with the entire litigation environment, and is therefore prepared to move forward.

The obvious question, which is your question, then why January 31st?

Frankly, it's a rather simple answer to that.

The Board, as you know, has always acted in an orderly and very deliberate manner.

And it is going to go through a deliberate formal process of crossing the T's and dotting the I's.

And I think also in addition to that, the timetable does coincide with Irene Rosenfeld, the Kraft CEO's announcement, of Kraft's new profitable growth plan.

And for us that's very important, given the concerns that have existed about a potential overhang issue.

So it's really 2 things, Christine.

The whole formal process, as well as the timetable coinciding with Irene's timetable.

Terrific.

Thanks for that.

If I could follow-up with Dinny on your guidance for the year.

Certainly, you were clear about the $0.04 coming into your guidance.

But there seems to be an additional $0.04 in the bottom end of your revised guidance.

Can you just elaborate where that would be coming from?

Well it's a number of factors.

A little bit on the tax.

A little bit on currency.

And basically what we're doing is narrowing the range and giving the upper side of the range.

Okay, great.

That's helpful.

And the last question I have is on Japan.

You have indicated the fourth quarter -- or expectations that some of that deloading would reverse.

Based on what you're seeing in the market, are you comfortable that we're actually through the inventory deloading this quarter, and that will in fact reverse in the fourth quarter?

Or is it partially through the fourth quarter?

I think we're pretty confident that most of it has come out.

Maybe a little more was to come out in October, but most of it is out.

If I could add a point, as well.

There are a number of new products slated for the fourth quarter in Japan as well, that should help.

Yes.

Thank you very much.

One moment while we poll for further questions.

Bonnie Herzog, Citigroup.

I guess I wanted to start out with just a question on the decision today by the Board which seems quite positive, especially based on what you just said, Louis.

So thank you for that.

When you wrote in the press release that you intend to finalize the decision, should we all assume that this was discussed at great length, either today or over the last month or 2, and there are just a few open items?

And I don't know if you can go into that, like what -- like you said they act very deliberately.

If you can go into what might need to still be finalized?

Well, Bonnie, I'm not going to go into Board deliberations.

It is clear that prior to issuing an announcement of this nature, the Board has given ample consideration to the risk-reward balance, has considered all scenarios in considerable detail, and they will be ready to go on January 31st.

Is that clear?

Hello?

Can you hear me?

No, we got cut off.

Oh, yes, it's absolutely clear.

But I was also curious, Louis, because you certainly state a date, which is helpful for the market with certainty aspect.

But is there anything that could cause the Board to actually announce something sooner, or earlier?

Is that possible?

Or are we to assume that that is the absolute earliest?

The Board's announcement is very clear that the date is January 31st, Bonnie.

All right.

In terms of moving over to the business, PM USA, a lot of the trade contacts that I have, have indicated, and certainly Reynolds has been somewhat open to this issue, in terms of the out of stock problems that they've been facing.

Have you found that this has provided your Company with an opportunity in any way?

Have you noticed anything, or anything you can share with us on this topic?

Our understanding, Bonnie, is that if there were stock shortages, they were essentially mainly at the wholesale level, not really impacting retail.

Yes, I heard retail.

And therefore, we haven't seen any movement towards us.

But won't it eventually reach retail if it's affecting wholesale through the chain?

Well, not necessarily, to the extent that they have ramped up production, which I believe is the case.

Okay.

I'd heard retail, as well.

And then I'd heard obviously some of the retailers are upset.

And I just thought that might provide you with an opportunity in the future, if it continues, even though -- .

My understanding is it was predominantly wholesale.

Okay.

And my final question is on Indonesia.

Sampoerna is doing very well.

And I'm curious if you can elaborate on what was implemented, or what you may have implemented to help you generate the volume increase of 9%.

Well, I think it's a whole gamut of things, Bonnie.

I mean, we started with a very strong Company that we acquired.

And I think we've added to it.

And the management -- and when I say management, both the ex-Sampoerna people and the PMI people together are doing a fabulous job.

When you say added to it, I'm never going to get you to quantify how much you invested in that.

No, but -- .

I know.

But as Dinny said, we did very well, both on the volume and the income line.

Well, no, and it's a great acquisition.

So I just was trying to have you share with us what you can bring to other businesses, and maybe the possibilities for the future.

Well, I suppose your question relates to future acquisitions.

Correct.

And we never comment on those, Bonnie, other than to say that PMI has grown through acquisition in the past, continues to be interested, and we have a number of promising prospects in the pipeline.

Beyond that, I can't say anything.

No, but bottom line, there are competitive advantages that you bring to these businesses that allow you to increase the volume greater than what it was increasing at before, correct?

That's what we believe.

Yes, thank you.

All right.

Thank you.

David Adelman, Morgan Stanley.

I wanted to ask you a few things.

I wanted to ask you a few things.

First of all, Louis, why in conjunction with the Schwab certification ruling, did the Company then indicate that that decision inevitably delayed the process, because clearly, it doesn't appear to be.

Well, David, let's be fair to when that statement was made, and that statement was accurate when it was made.

It was made within 2 hours or 3 hours of the ruling that was some 560 pages that came out, and the statement was very accurate at the time.

Today, the Board has brought clarification as to its timing, and whether Schwab has delayed or not is somewhat irrelevant today, because I think the announcement is crystal clear.

Okay.

And then Louis, if you're so confident that -- and you know the decision you'll make on January 31st, why not just have the Board -- why didn't the Board today declare the dividend of Kraft payable at some future date?

Well, I think I tried to address that in terms of why January 31st.

Because of the orderly process and the deliberate formal process that has to be carried out, David.

And to be clear, Louis, if 23(f), if the industry's 23(f) motion in Schwab is not granted, that wouldn't delay or alter the Board's assessment of the overall legal environment, such that you wouldn't then proceed?

I'd just have to repeat what I said earlier, that the Board is comfortable with the litigation environment.

Okay.

A couple of last things.

Clearly, this is not without risk.

Okay.

But we are prepared for that, and the obvious risk is a risk of an injunction.

Sure.

But we believe that such an action would not have merit and that we would ultimately prevail.

Okay.

It's very important, and I think you know this, David, but it's very important to realize that an injunction would have to be based on a finding that Altria is insolvent, or that the decision is being done with fraudulent intent.

And I think to find something on either count would be extremely difficult.

Louis, do you think the length of this -- of your restructuring effort, granted, a lot of the delays and dynamics were outside of your control, it was dynamics in other courts, but do you think that that has adversely affected some of the divisional operating performance?

No, I don't think so, David, at all.

Okay.

Now, clearly, would Kraft be better off independently?

The answer is a crystal clear "yes" for all of the reasons that we have enunciated in the past, and that's why this makes so much sense.

The business purpose is so compelling that we have a very, very strong case.

And then lastly, Louis, on the issue of fraudulent conveyance and a potential injunction, can you frame for us how long you think that process, assuming that it's pursued by the plaintiffs, how long that process might take until you have resolution?

David, I hope you do understand that I'm not about to divulge our litigation strategy in any way.

So I'm not going to answer that question.

Okay.

And then actually Louis, one last thing.

What can be done, do you think, broadly to accelerate PMI's rate of operating profit growth and volume growth?

Well, PMI has in recent years, as you well know, really suffered from it's strength.

And it's strength has been a significant position in the premium segment in the EU markets, which have, a lot of them, gone through quite difficult times, with France, Germany, Italy and now Spain, Portugal also.

And we've had significant tax increases that have hurt consumption, a number of public smoking restrictions that have hurt consumption.

And clearly, there has been significant growth in the low price segment, in part, due to tax.

A lot of these things have been addressed, and most of them are behind us.

Italy and France are poster childs, where things are fixed now.

Spain, we still have challenges as Dinny said.

However, our third quarter share was higher than the second quarter.

And in fact, our performance probably was a bit better than the numbers would suggest, because the September shares were somewhat distorted by increase in the low price segment, because they took a price increase.

We're still cautiously optimistic that a minimum excise tax increase will be announced, hopefully early in the new year, which clearly would help as it has helped in France and Italy.

Germany, as Dinny said, cigarette consumption is actually looking much better than it has in the past.

That's because tobacco portions are essentially eliminated.

The concern we have is really two-fold.

Initial indications are that smokers are moving to fine cut, to non-domestic cigarettes, and then to domestic cigarettes, so that's 1 concern.

We had hoped there would be more movement back to conventional cigarettes.

And clearly the other issue is the advent of a VAT increase from 16% to 19% in January.

And as you know, we took a price increase.

We announced a price increase I think some 10 days ago.

Right.

Now, most of the concerns about Western Europe are behind us.

Japan, we probably had to focus so much on the Marlboro take back, and you know what the reward of that was, that we probably lagged competition in terms of new products.

And I think we have a pretty exciting pipeline going forward.

So that was a conscious decision to really focus on the Marlboro take back and insure that went as smoothly as possible, and that has been the case.

And now we're working on the rest of the brand portfolio.

And elsewhere, we're actually doing pretty well, David.

This quarter had a number of negatives.

But I still feel pretty confident about PMI going forward.

Okay, great, Louis.

Thank you very much.

Judy Hong, Goldman Sachs.

Louis, I'm wondering if you could talk a little bit about the Board's view on the PMI spin-off.

I mean, clearly today's announcement makes it pretty clear about the Kraft spin-off.

But what is the Board's view on the potential PMI spin-off and the potential timing of that piece?

Judy, I don't want to elaborate at this stage.

We've always said let's go one step at a time.

Clearly, that is something of significant consideration to the Board, but let's do step one first.

I mean, given some of the legal developments that have happened in the past, do those developments play into the Board's thinking that the next piece could come either sooner or later, or is that irrelevant?

That's irrelevant.

We are very comfortable with the litigation environment, how it has progressed, and in the future.

Okay, and then in terms of the Moody's upgrade yesterday, does that indicate any heightened intention to resume share buyback in front of the restructuring?

Or are we going to basically wait until any restructuring takes place on the share buyback?

I think, Judy, that clearly, the big reward is the restructuring.

We would like these companies to start life with very strong balance sheets.

And thereafter, they will determine their own optimal structures and dividend and share buyback policies.

Okay.

And then, just in terms of the operations.

For PM USA, can you talk a little bit about the level of profit growth in the third quarter?

It looks like even if you take some of the spending related to the excise tax ballot initiative out, the level of -- or the rate of profit growth slowed in the third quarter.

Can you just talk about what happened there?

I can try, Judy.

I should mention one thing, because we talked about Moody's just earlier.

I've just been passed a release here where S&P has also revised it's rating outlook from stable to positive for the Company.

So we see that as a very positive move, as well.

In terms of PM USA, part of the issue was, if I recall correctly, other than the spending for the ballot initiatives, leaf cost in terms of the LIFO implications and the benefit we got last year from the quota buyouts for 2005 purchases, which had a relatively significant impact.

And I would say that in terms of the promotional levels, they're pretty well constant versus the prior year, Judy.

So if that's what you were driving at, that's not one of the drivers here in terms of [inaudible].

Okay, thank you.

Chris Growe, A.G. Edwards.

I just have 1 question, and forgive me if this was just asked.

I missed the response on Judy's question.

But relative to other elements of the corporate restructuring, like share repurchase or any other of the other things you could do with the cash, have you addressed what the Board may decide on January 31st, or if there is even considerations prior to the full Kraft spin-off being announced?

I think I addressed it with Judy's question.

We do this one step at a time, Chris.

Yes.

What's on the table now is the Kraft spin-off.

Okay, forgive me.

I did miss that answer.

And my second question is relative to PMI, with pretty meaningful or beneficial foreign exchange coming through in that division right now, do you believe that PMI needs some incremental, like, reinvestment back into the brands, at least in certain countries?

And you'd like to maybe take some of that, for example, some foreign exchange outside if you could use that example, to reinvest back in the business?

Well, let me first question the premise of your question, which is significant currency benefit.

In the quarter, it was $5 million, Chris.

So we're not seeing huge currency benefit here.

The Yen has been particularly weak, and the Turkish Lira, certainly in the third quarter, was a significant factor as well, which more than offset what you would believe is a weaker dollar.

So we're not seeing a weak dollar giving us currency favorability that we could reinvest, Chris.

Okay.

So I'd just question the premise.

Well, I think wasn't foreign exchange -- sort of improving rates in foreign exchange used as a reason to kind of bring up the bottom end of the guidance range.

And I'd have some projections going forward that I based off of current currency rates.

And it seems more favorable for the fourth quarter.

So I was kind of looking ahead here, and even in early '07, that was the premise of the question.

And then -- ?

I think it would be fair to say that currency has improved versus our initial outlook.

Okay.

And that's why we narrowed the range to the higher end of the original range.

Okay, that's a good point.

That would suggest that we're not reinvesting it.

Okay.

Do you believe PMI needs to reinvest more heavily?

Would that -- ?

No.

I think PMI's investments are at the appropriate levels.

Okay.

I appreciate that.

Filippe Goossens, Credit Suisse.

First, my congrats with the Moody's upgrade.

Long overdue here.

Thank you.

Dinny, just a housekeeping question first.

Can you tell us at the end of the quarter what the net worth position was of the tobacco stuff, please?

Yes.

It was $12.8 billion, Filippe.

Okay, thank you.

And then my next few questions are for Louis.

Louis, with some of the dynamics from the S market perhaps also going to Western Europe, I'm referring specifically to more smoking bans being implemented, tax rates going up, and given our outlook over the next number of years for International consumption actually at a decline on a global basis, we would argue that we may need to see a round of global consolidation, and we would expect PMI obviously, to play a leading role in that.

Can you perhaps share 2 things with us, Louis?

First, can you refresh our minds in terms of what your parameters are typically when you do look at acquisition opportunities?

And then second, given that we don't have further work yet on a potential spin-off of PMI, is the timing of any activity with regard to PMI going to play any role in any potential decision on the potential acquisitions?

That's several questions here.

I think we've been pretty clear, Filippe, that PMI is very focused on acquisitions as one of the elements of it's growth strategy going forward.

I do not believe that a potential restructuring of the Company would in any way effect acquisitions by PMI.

They would continue.

Indonesia was a perfect example of that.

And as I said earlier, I believe to Bonnie, we do have a pipeline of potential projects, whether they will materialize or not is another question.

But we are following those through.

With regard to whether there will be a cycle of industry consolidation or not, that remains an open question.

Given our size, clearly we have a number of anti-trust issues that have to be given consideration to.

With regard to the precise parameters of our acquisitions, we want to insure that we have attractive economic returns from those acquisitions.

And clearly, we would want EPS accretion, but that would not be enough.

Most acquisitions are accretive to EPS when you don't have to amortize goodwill.

And therefore, it's really a focus on attractive economic returns.

Okay.

My second question, Louis, the fact that Imperial Tobacco recently applied to MSA is further validation and basically also concurs with the view of your Board that there is a material and hopefully, sustainable improvement in the legal environment.

Depending on how they decide ultimately to enter the U.S. market, whether it's through organic means, or whether it's through acquisitions, how do you think that might impact the competitive environment in the U.S.?

And what game plan do you have in place in case they were to go the acquisition route?

Well, clearly, we have the deepest respect for Imperial.

If they go to the acquisition route, the ownership will change of one of the existing competitors.

I don't think it would make a material difference to PM USA strategy or competitive position.

If they go organically, it will be quite a slug.

But as I say, we have the highest regards for Imperial and clearly, it will be an additional competitor, potentially.

Okay.

My next question, Louis, with regard to the smokeless segment.

Can you provide us an update in terms of how the current test is going, and when you might plan to kind of expand that test?

And then secondly, again from a competitive perspective, the fact that this morning Swedish Match announced they're teaming up with [Lorelar] to develop smokeless products.

Do you see that as a validation of the growth potential of the smokeless sector?

And could that have any impact in terms of how you think how you will play that sector in, whether you need to accelerate your current plans?

Thank you.

Okay, Filippe.

Clearly, it is a growth segment, so I'm not at all surprised that all industry players are interested in that segment, and the various components of that segment.

So that's not a big surprise to me.

It is a growth segment, and I think it's a segment that's here to stay and will continue to grow.

With regard to our test market of Taboka, I think we are learning a lot, and we continue to learn from that test market.

As to future initiatives, I would not want to give you any timing, other than to say that there will be future initiatives.

And we've said for some time that we are committed to participating in the smokeless category in a rather large way.

And we believe we have the infrastructure in place, and we are learning through this test market, and have plans to do other things going forward.

And the intention, Louis, I'm going to try to go out on a limb for a second, I do apologize, but the intent would be to accomplish that organically; correct?

Of course.

That's why I mentioned the infrastructure.

The preference would be to do it organically.

But I would not in any way say that we would not pursue any acquisition that didn't make perfect sense, that met our criteria and had attractive economic returns.

Thank you very much, gentlemen.

Erik Bloomquist, JPMorgan.

3 questions.

First on PM USA, you noted that post break-up, each of the companies would control their own capital structure.

I was wondering if you could comment at all on what we might expect from PM USA in terms of acquisitions outside of the U.S. borders?

That's a premature question, Erik.

Totally premature, so I'm not prepared to elaborate on that.

I hope you understand.

Yes, thank you.

Secondly, in terms of operations in PMI, Russia looks to be performing very well with the up trading.

I wonder if you could provide us more color on that?

And in particular, 2 components. 1, the sustainability of that up trading, and secondly, why L&M was down?

If it was a victim of the success in the up trading up to Marlboro, or if there was something else going on in that market?

You're right.

Russia, there has been considerable up trading to the premium segment.

It's a phenomenon that's been going on for some time.

L&M is partially suffering from that.

I think L&M's brand equity has been somewhat weakened in the recent past, and it is something that we are addressing vigorously.

And there are actions in place over the next year to reinforce that brand, which remains a very important brand.

But we are pleased with our premium brand offerings.

We have some exciting new products again in the pipeline in the premium offerings.

I would say that L&M's weakness is probably linked to the fact that it is somewhat perceived as a full flavor brand.

And the market is moving more towards light cigarettes, low tar and nicotine cigarettes.

And that is something that we need to address quite vigorously with L&M, and we'll do that.

Am I pleased with our share performance?

No.

I think we could be doing better, and I'm sure we will be doing better.

Just following on in Russia, I think we're expecting excise tax increases in '07, '08 and potentially in '09, as well.

Is that something that will impact, do you think, the up trading?

Or is that something that will simply be absorbed as economic growth continues and consumers continue to look for premium products like Philip Morris's portfolio?

I would say that it would continue the move towards premium, because you are right, there are going to be tax increases.

But what is very important to note is that, whilst a couple of years ago there was a change from specific to ad valorem, it has now come back to predominantly specific tax structure.

And therefore, that's always a positive for the development of the premium segment.

Great.

Thank you.

Last question is concerning Japan.

The volume declines I think were what we were thinking of in terms of the trade deload, but on a year-to-date basis, or an overall point of view, could you give us some color as to what we might expect for the overall market volume declines?

We're expecting for the full year, Erik, a consumption decline of about 3.5% to 4%.

Okay.

And then with volume declines of really that little, can you give us any kind of indications as to the magnitude of the benefit of the price increase that you've taken across, I think it's about 35% of the PMI volumes in Japan?

No.

I'm not going to give you that number, Erik.

Okay.

Well, thanks very much.

Ann Gurkin, Davenport.

If we could start with PMI.

You all made an acquisition of a privately-owned Swedish news company.

Can you talk about the rationale behind that acquisition?

Yes.

We purchased a very small, I would call it minute company in Sweden.

And this wasn't dollars of any magnitude that hits the radar screen, I can assure you.

It was really part of our strategy to learn more and more about the smokeless category, and to participate in that category.

So it's part of our strategy, and we're getting know how.

They have a few important patents, in terms of Snooze that we believe can be further developed.

Great.

And then switching back to the U.S, in terms of the proposed state excise taxes, particularly in California, can you walk me through or help me understand how you're kind of preparing, if the worst case scenario should occur and that proposition gets voted in?

Yes.

Well, clearly that is a big question mark for next year as to the impact of California.

And that's why the industry is trying to vigorously oppose such a huge tax increase for the sort of wrong solution.

We're concerned that it will have adverse ramifications on consumption.

But even for California State coffers, because an increase of that magnitude may somehow have unintended consequences in terms of cross border flows of cigarettes, et cetera.

So I would say it's very difficult to determine what the impact will be.

Clearly, it will be negative.

But our hope is that that proposition will not be voted.

That's why we're opposing it so vigorously.

How are your inventory levels in California?

I'm not going to disclose what our inventory levels are at.

Are you comfortable with where they are right now, or are they too high?

We are comfortable with our inventory levels everywhere.

Okay.

And then lastly, living in Richmond, we see the research center go up.

I was just curious when we might hear news from PM USA regarding products they're working on outside of directly adjacent categories, outside of the tobacco.

Yes.

When should we hear news?

You will hear news when they are ready.

How about in the next 1 to 2 years?

Is that a fair assessment?

They are very focused on a number of initiatives, and they will be announced in good time, Ann.

[OPERATOR INSTRUCTIONS] Nanette Byrnes, BusinessWeek Magazine.

Building on that question -- the second to last question there a little bit, I wonder if you can address how big a challenge globally excise tax increases are for the Company at this time?

If you could give me a sense for how concerned you are about them now versus historical, whether you're more or less concerned and what the trend is?

Nanette, I don't think I'm more concerned than I was in the past.

Excise taxes are a fact of life in tobacco.

The tax structure is very important.

So I'm more interested tax structure than I am in tax incidence.

And historically, we've had quite a lot of success in insuring that tax structures are fair.

And there has been quite a lot of movement in that regard worldwide.

Even here in the smokeless category, there are initiatives to insure that taxes are of a specific nature rather than an ad valorem nature.

Now, the big issue with significant tax increases is that they always have unintended consequences.

And that has been the history of the tobacco industry.

And that's why we oppose dramatic and draconian tax increases, because they always have detrimental effects.

We're not opposed to fair tax increases.

But when they become draconian, they have the potential of disrupting the industry.

You mentioned that you're cautiously optimistic that there may be a change in Spain early next year.

Could you just elaborate on why you're cautiously optimistic about that, and what difference that would make for you ?

Well, the good news was earlier this year, Spain instituted a minimum excise tax.

In so doing, the government had essentially publicly disclosed that they would like to see a minimum price of 2 Euros per pack.

The minimum excise tax that was imposed, they believed at the time, presumably would do the trick.

It didn't do the trick.

There are products still selling at 1.75, 1.85, and more recently some have increased to 1.95.

But they haven't reached that 2 Euro per pack threshold that the government had sort of set as a health policy.

So because of that, our sense is that the government will intervene and increase the minimum excise tax.

Okay.

Is that clear?

Thank you, yes.

Andrew Martin, The New York Times.

Just quickly, the release says that this announcement in January, I mean, the way it's written it appears the Board could announce that they will finalize its decision on Kraft after the Schwab case is completed.

Can you give me any idea what the intention is in terms of timing?

I mean, should we be looking at some time next spring or months, weeks afterwards?

Do you have any sense of that?

I'm not going to preempt what the Board will decide as the precise dividend record date.

They will decide that and announce that on January 31st.

Thank you.

Does that complete your question?

Yes.

Thomas Russo, Gardner Russo & Gardner.

Louis, a couple of questions on International.

I'm curious to have an update on developments in China, if you can bring us up-to-date on those?

And a less pleasant topic might be for Bill or somebody else to comment about the Manitoba Provincial Health Claims that I gather may have a chance of going forward.

China first.

Okay, China first.

China, we had hoped that by now we would be producing, Tom.

Regretfully, we're not yet.

Things have been rather slow.

Nothing material.

There's been a whole slew of formalities that have had to be completed.

And we're essentially done now.

And I won't give you the whole list of licenses and other permissions that had to be granted from various departments, but we're essentially there.

There has been progress on the joint venture, as well.

And there we'll be launching brands early next year, as well.

So I hope that in '07, we'll be in full work, both in China and for the International joint venture.

Great.

Regretfully, Bill is not here, Tom.

So I can't comment on the Manitoba issue.

I think I am aware of it, that it follows what else has been going on in Canada.

Yes.

And our sense is that it's going to take a very, very long time.

As you know, our presence in Canada is limited to a minority stake in Rothmans Benson & Hedges.

So there isn't really a material exposure that we have in Canada.

Great.

And then lastly, just the disposition of either Philip Morris Capital Group or SABMiller, as you consider the potential for a spin.

I suspect it's too early to comment.

But how would you see those 2 non-operating assets handled through the reorganization?

Yes, Tom, it's clearly premature.

PMCC, we have chosen a strategy which I think is the best strategy to exit over time.

And frankly, a sale we do not believe would give us the appropriate value over time.

Because it would trigger the acceleration of all sorts of taxes, and we potentially would not get the benefit of the increases over the residual values that we believe a part of that portfolio.

With regard to SABMiller, we're very pleased with that investment, and we see no reason at this stage to exit partially or fully from that investment.

We're quite happy to ride along with SABMiller's success.

Thank you, and good luck in Brooklyn.

Thank you.

This does conclude the Q&A session.

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

I just want to thank everyone for joining us today on the call, and we'll look forward to speaking with you again next quarter.

Thank you all for joining us.

Thank you.

Bye-bye.

Thank you.

And thank you, callers.

Ladies and gentlemen, this does conclude today's teleconference.

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