奧馳亞 (MO) 2007 Q1 法說會逐字稿

Good morning, and welcome to the Altria Group first quarter 2007 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] In order to ask a question, please press the star key followed by one on your touch-tone phone at any time. 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 to via the audio webcast we're providing summary slides of first quarter results. Today's call is and limited to a discussion of our business results. Our remarks today 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 varies factors that could cause actual results to differ materially from projections. Please note Altria's reported results and previous year results reflect Kraft Foods as a discontinued operation for the first quarter of 2007.

As such, net revenue and operating Company's income for Kraft are excluded from the Company's results while the net earnings impact is included as a single line item. We have provided pro forma financials by quarter for the years 2005 and 2006, and in our news release. For a detailed review of our first quarter results I direct your attention to the news release we issued earlier this morning which is available at our website at Altria.com. Now it's my pleasure to introduce Dinny Devitre, Altria's Senior Vice President and Chief Financial Officer.

Thank you, Nick and good morning, everyone. We are, of course, delighted that the Kraft spin-off was successful completed on March 30th. This was an important step in the strategy we first voiced several years ago to enhance shareholder value and we firmly believe this transaction will benefit our shareholders for years to come.

Quite naturally, our shareholders and the broader investment community are now focusing on the actions we've may take going forward to further enhance shareholder value, given the significantly improved litigation environment, our solid business momentum and our stellar balance sheet. I do not intend to address this topic on this call other then to state the following. We remain as committed as ever to meaningfully enhance long-term shareholder value. Over the next several months, we will continue to carefully and diligently examine the benefits of a spin-off of Phillip Morris International and other possible value enhancing options to decide the optimal long-term strategic course to follow. Once a decision has been made, we will promptly communicate it.

One last point before I move onto our quarterly results. There has been much speculation in the press and elsewhere that we will aggressively pursue a large transaction. It's been our long standing policy to never comment on such speculation. However, I do wish to emphasize that we take a very disciplined and judicial approach to acquisitions and we will only pursue those that provide attractive economic returns, are strategically compelling and create long-term value. I will now briefly review Altria's first quarter results. Diluted earnings per share from continuing operation we're $1.01 including the items listed on schedule 3 of our news release versus $1.24 in the year ago quarter which included a $0.30 per share tax benefit. Adjusted for that and other items diluted earnings per share for continuing operation we're up 5.1% to $1.03 versus $0.98 in 2006.

We raised our projection for 2007 full year diluted earnings per share from continuing operations to a range of $4.20 to $4.25 reflecting an improved outlook and Philip Morris International due partially to favorable currency.. This is up from our previous projection of $4.15 to $4.20 per share. Our original guidance included $0.4 per share of cash recovery at Philip Morris Capital Corporation and we now estimate that cash recovery will be approximately $0.6 per share of which $0.4 was recorded in the first quarter. In addition, the revised projection includes charges of $0.9 per share of which $0.6 per share were recorded in this quarter.

Turning to our domestic and international tobacco company results I'll start with Philip Morris USA. In the first quarter, operating companies income increased 1.3% to $1.1 billion primarily driven by lower wholesale promotional allowance rates, decreased promotional spending and lower general and administrative costs, largely offset by lower volume, increased resolution expenses and higher spending on new products. PM USA shipment volume of 40.6 billion units was down 6.2% or $2.7 billion units versus the prior year. About 2 billion units of the decline is estimated to be driven by overall industry weakness. The remainder of the decline was due to higher wholesale inventory depletions of Philip Morris USA brands versus the prior year, timing of promotions and consumer pantry purchases ahead of the January 1, 2007 excise tax increase in Texas. Adjusting for these factors, Philip Morris USA estimates it's volume decline would have been approximately 5%. Retail share was unchanged at 50.4% as share gains for Marlboro and Parliament were offset by losses of 0.3 share points for its non support brand and 0.1 share point each for Virginia Slims and Basic.

Marlboro Smooth was launched nationally in March 2007 and is and meeting PM USA's expectations. Although, share was unchanged in the first quarter versus the prior year period, share trends improved in March following weaker share trends in January and February, 2007 due to lower promotional spending then the previous year. PM USA underlying shipping performance improved strongly in March. Philip Morris USA estimate that's cigarette industry volume declined between 4% and 5% in the first quarter. This significantly higher decline versus the long-term underlying trend was primarily driven by a number of price related factors including reductions in manufacturers off invoice allowances and increases in manufacturer's list prices related to stepped up resolution payments as well as increased state excise taxes primarily in Texas, where PM USA has a higher share then its national share. Including the January 1, 2007 excise tax increase of $1 to $1.41 per pack in Texas. Total weighted state excise taxes rose to $0.96 at the end of first quarter, fully $0.8 higher then the 2006 year-end rate of $0.88. This compares to a $0.6 increase from the full year from the end of 2005 to the end of 2006. PM USA estimates that's as the year unfolds the industry decline will moderate and for the full year the totally industry volume will be about 3% to 4%. Excuse me the total industry volume decline will be about 3% to 4%. For 2007, Philip Morris USA forecasts moderate growth in retail share and operating companies income growth of 2% to 4% reflecting planned investments in support of numerous new product initiatives.

Turning to our international tobacco business. In the first quarter, PMI's operating Company income increased 9.5% to $2.2 billion due primarily to higher pricing and favorable currency of $96 million. PMI shipment volume increased 1.5% to 213.3 billion unit driven by the inclusion of all Lakson volume in Pakistan beginning in March and solid gains in many markets including Italy, Poland, Egypt, Ukraine, Indonesia, Korea and Argentina, partially offset by declines in certain markets, namely Germany, Russia and Japan. In the profitable EU region, PMI's cigarette shipments were up 3.4% and share rose 0.2 points to 39.5% despite continued challenges in Germany.

Total tobacco volume in the first quarter in Germany was down 6.8% due mainly to lower volume for other tobacco products. PMI's total tobacco share at 29.1% was unchanged versus the prior year quarter. The total cigarette market in Germany increased 0.5% due to the growth of the low price segment. However, PMI's in market sales declined 2.1% and market share was down 0.9 points to 36.2%, largely attributable to the contraction of industry sales through the vending channel. The decline in vending was attributed to the reduction in machines from approximately 570,000 to 470,000 due to new regulations that require electronic age verification. Compliance with these regulations resulted in the elimination of many older generation vending machines with access to the the remaining machines more complex and less convenient.

As a consequence, even though PMI's total cigarette share and vending and in other trade channels rose 0.2 share points and 0.6 share points respectively, it's overall share declined. Marlboro declined 3.5 share points to 25.9% due mainly to losses in vending, partially offset by a gain of 2.6 points for L&M. With a 42.1% share of the vending market, Marlboro was disproportionately impacted by the decline in industry sales through this channel.

In Spain, the cigarette industry was flat versus the prior year quarter and PMI's in market sales declined 3.3% with share down 1 point to 31.7% due mainly to Marlboro which suffered from a difficult comparison to the prior year period. Importantly PMI experienced solid improvement in its profitability in Spain during the first quarter.

In Russia, shipments were down 6.6% and share declined 0.2 points to 26.6% due mainly to L&M and local low price brands partially offset by higher sales in market share of higher margin international brands, Marlboro, Parliament and Chesterfield, combined shipments for these brands were up 10% and share grew 0.6 points in the first quarter. Better pricing and improved mix resulted in significantly higher income in Russia in the first quarter.

In Japan, the cigarette industry was down 5.7% in the first quarter, due to the July, 2006 tax-driven price increase. PMI's in market sales were down 5.8% resulting in PMI's market share remaining unchanged at 24.7%. PMI's shipments in Japan were down 17.5% versus the year ago quarter due to the effects of the 2006 price increase and an unfavorable comparison with the prior year quarter, which included distributor purchases in advance of the 2006 price increase and higher inventories at year-end, 2006. As the year unfolds, PMI shipment performance in Japan is expected to improve as it lapsed the price increase of the second quarter of 2006. PMI's business continued to perform strongly in many markets during the first quarter. In Italy, share rose 0.9 points to 54.2% driven by Marlboro, Chesterfield and Diana. Quarter-over-quarter market share gains have been achieved in Italy for nine consecutive periods.

In France, PMI's share increased to a record 43.3% in the first quarter fueled by Marlboro and the Philip Morris brand. In Poland, reduced price gaps helped PMI achieve a 2.3 point share increase with Marlboro share advancing a solid 0.9 points to 8.4%. Market share grew 0.7 points to 62.3% in Mexico driven by the launch of Della Carta Supremeos in January, 2007 and the continued growth of Benson and Hedges.

In Indonesia, the strong performance of A Hijan resulted in a market share increase of 0.5 points to 28.4%. Total Marlboro shipments were down 2.8% due mainly to the reasons I described in Germany and Japan. However, Marlboro market share was up in many markets as noted in our news release. Although shipment for L&M declined 2% in the first quarter, shipments for many of PMI's other international brands rose solidly in the same period. Parliament grew 14%. Lark was up 6%. Murratti rose 12%, Balt Street was up 14% and the Philip Morris brand increased 7%. To sum up on PMI, it has superior brand portfolio a pipeline of new products and business development strategies to drive long-term growth.

For 2007, PMI's volume is forecast to grow between 2% and 3% including all Lakson and volumes in Pakistan beginning in March. Absent Pakistan, volume is expected to be essentially flat. Operating companies income is forecasted to increase 5% to 7% in 2007 excluding currency, restructuring charges, and the 2006 Dominican Republic gain. This concludes my introductory remarks and now I will be happy to take your questions.

Thank you. We with will now conduct the question and answer portion of the conference. [OPERATOR INSTRUCTIONS] Again, in order to ask a question or make a comment, please press the star key followed by one on your touch-tone phone. Our first question is from David Adelman of Morgan Stanley. Please go ahead.

Good morning, Dinny.

Hi, David.

I wanted to ask you about several things, first in terms of next restructuring steps, Dinny could you help us understand when PMI would be prepared, if not now today, to be an independent, publicly traded company if that's a decision that that board ultimately elects?

As I said we weren't going to say anymore on the restructuring issue but I will tell you that PMI is organizationally ready to stand independently. If that's what the board final decides.

As of today it is.

Yes.

Let me ask you some business questions, Dinny. Are you taken aback by the consumption decline coming into 2007 in the U.S. cigarette business and is there something else afoot other then pricing is the accumulative affect perhaps of some of the region smoking bans, is there something else going, and do you think absent large scale additional excise taxes increase of the industry consumption trends will normalize next year?

I think the level of decline was slightly higher then we expected. I think they're probably a couple of factors in that. Obviously the price increase that was taken at the -- effective price increase taken at the end of last year was the main driving factor. You've got to say that some of the smoking bans that we see around the country have a bit of a accumulative effect but at the same time I want to reiterate that I think the decline we've seen in the first quarter will certainly moderate as the year progresses and as I said for the full year we expect the decline to be somewhere between 3 and 4% and depending on how state excise taxes do, we could see even lower declines in 2008 and a trend -- a movement back to the long-term underlying trend.

In terms of PM USA adjacency strategy, it's been talked about for quite some time, what's the limiting factor? Why isn't that in the marketplace already?

Well, I think we want to go about this in a very deliberate way, David. And obviously anything we do in that area we want to make sure we're successful with and therefore, we're continuing with our tobacco test market In the meantime we've set up the York plant to manufacturer adjacent products so we're getting ready on the manufacturing front and I think you'll see more action from us as the year continues.

Okay and then, Dinny, lastly one question internationally. I think the comment you made early on in your prepared remarks about not doing a large scale low-returning transactions obviously fabulous. That's not something your shareholders endorse, so that's great, but what are the competitive implications long-term of both businesses, quite frankly, sort of keeping on their organic path while large scale consolidations going on around you. In other words, [Gallor] heard JT closed yesterday. Imperial's approach to [Altodus] Imperial buying commonwealth the in the United States. If you could comment on that, please.

David, the fact is that PMI or Altria, really, he's grown our tobacco businesses have grown in the past both organically and through acquisition. We've done very well when large scale consolidation has been going on around us in the past and I think we'll be able to follow the same strategy in the future.

Okay. Thank you very much.

Thank you.

Thank you your next question is from Judy Hong of Goldman Sachs. Please go ahead.

Good morning, Dinny.

Hi, Judy, good morning.

My first question is to the extent that it takes several months for board to really decide on the next part of the restructuring, is there any consideration to perhaps resume a moderate share buyback just given how strong your balance sheet is at this point?

Right, our balance sheet is very strong but until the board makes a decision, I don't think you can expect any share buyback.

Okay. Secondly, just in terms of the clarifications on your guidance, if we back out one time items, it look like the underlying guidance is 423 to 428. In your view, is this number 4 or $0.5 higher then was implied in your last guidance?

Actually it is $0.5 higher. -- it just depends on how you look at it we frankly only give guidance on a reported basis, Judy, and it's up to the analyst to figure out what the underlying guidance is.

Okay. So but on a reported basis it's $0.5 higher --

Exactly right.

Is that primarily currency. Is there anything underlying trend's perspective.

It's primary currency.

Okay and thirdly, if we look at the PMI's operating profit growth in the quarter and you back out currency and one time items it looks like underlying operating profit was up about 4 to 5%. Can you talk about how much the Japan's timing issue hurt this number?

Yes. In fact, if you back out currency PMI's OCI was up more then 5%. Japan's timing issue did have quite a significant impact there was a depletion of about 2.5 billion units in Japan in distributing inventories and Japan has high margins. So, I'm not going to give you a specific number but there's quite a lot of profit that we gave up as a result of that inventory depletion.

Okay and just a couple of just housekeeping items, in terms of the interest expenses for the quarter, can you tell us why that was so much higher versus the fourth quarter of last year?

Well, the interest line actually includes interest that we paid to Kraft on the tax reserves that we transferred to them in the first quarter of this year.

And how much was -- was that pretax?

Around close to $80 million.

Okay. And then my final question is why was the minority interest lodged equity income line down versus last year.

I'm not going to get into the specifics of that because our minority interest line includes both SAB Miller as well as minority interest that PMI has. So I would rather not get into the specifics of that number.

Okay, thank you, Dinny. Thank you.

Thank you. Your next question is from Christine Farkas of Merrill Lynch.

Thanks a lot. Good morning, Dinny.

Good morning.

A couple of questions on your international business. Firstly on Germany you've highlighted the impact from Japan. Can you tell us how long this vending machine issue might take to resolve given how big your market share is there. Is there anything that can be accelerated to get the vending machines volumes back on track?

The fact is that the vending machine channel has contracted. Last year in the first quarter it accounted for about 22% of total sales. That number is down to about 14% of total sales this year. And now -- what the trend is going to be in the future is a bit difficult to predict at this stage, but I would say it's not going to go lower and it may improve a bit as people get more used to how to access vending machines. So I think that 14% number will increase slightly for the remainder of the year, but I'm not sure what it's going to go back to the original level of 22%. In the meantime, of course, other channels like gas stations, tobacco stores, food stores, et cetera are going to take on more of the volume and Philip Morris International has taken initiatives and is is well positioned in a number of these channels. So I think over a period of time the disadvantage that we faced in vending will be overcome by our improvement in these other channels, particularly gas stations.

Okay. That's helpful. In Russia, certainly you described the brand's growth or brand weakness, but aside from the tough comparisons there, is there something else in Russia in terms of an under lying trend just given the decline in the first quarter versus the last couple of quarters, what else she we be looking there as far as trend for '07?

The problem we're facing in Russia as I said in my earlier remarks, is L&M is losing share and our low price brands, local brands [inaudible] are also losing share and we've got to address the L&M problem and PMI has plans to address the L&M problem and we just have to wait and see. In the meantime, we're very pleased with the progress of Marlboro and Parliament and Murratti and our other premium brands. We've been very successful with the introduction of Slim and Super Slim brands in Russia under the Virginia Slims trademark and those are doing very well. I think if you look at the overall situation in Russia it looks good. Our mix is improve and that's being reflected in improved profitability.

So the premium mix and the profits are going up but optically volumes and share it's happening at the low end?

Yes, exactly right.

And a last question on your Pakistani acquisition, just based on your reported numbers versus our expectations was the contribution from this acquisition as you expected in the quarter or a little bit lighter then you expected in the quarter?

What happened was, I think in our earlier statements on Pakistan, we reference a number of 30 billion unit that's Lakson has sold in the fiscal year ended June, 2006. And then it just became a question of timing for 2007, so, this year the actual volume obviously that we're going to record is not going to be 30 billion units it's going to be less than that, but in fact, the volume that we're going to record for this year, we estimate is going to be higher this afternoon we originally planned for. I'm sorry I sort of -- was I clear there.

Right until the end.

We thought we would record sales for January and February and, in fact, we could not record sales for January and February because we only acquired the company in March.

Got it that's helpful. Thanks Dinny.

Thank you, your next question is from Chris Growe of A.G. Edwards. Please go ahead.

Hi, Denny.

Hi, Chris.

Just I have a couple of questions for you. First one I wanted to be a little more clear on the PM USA situation in the quarter there was a comment you made in the release of reduced promotion year-over-year in January and February but March came back pretty strongly was there some kind of increase in promotion in March or a better market environment in March?

We did increase promotion in March?

Did the decline in January and February was related to your --

Lower levels of overall promotion compared to last year in January and February.

That wasn't the off invoice stuff. You're talking about in market promotion.

Exactly.

Just curious if the U.S. industry declined for the the year is it 3 to 4% was that more aggressive then you were expecting before or is it the same?

It's slightly more aggressive then we were expecting before.

I wonder if I could ask just two quick ones then on filter plus product in Korea that you've been excited about. Is that a product we should see expanding to new markets throughout 2007?

Yes, it started off very well in South Korea and we're going to move it to other markets.

The last question I had was the net debt in the quarter was around $5 billion in that neighborhood. Is there still an expectation to have a net cash position of around $2 billion for the year, I have it was a projection that you've made near the end of '06?

Yes, that's a fair assumption and the net debt was higher at the end of the first quarter because this is a period where we pay off -- make the MSA payment and then the normal dividend.

Okay that's great, thank you. Okay.

Thank you, your next question is from Bonnie Herzog of Citigroup. Please go ahead.

Yes, Bonnie.

Your line is live on mute and proceed with your question. We'll move on to the next question from Thomas Russo of Gardner Russo.

Hi, Dinny.

Hi, Tom.

First of all congratulations on the start of life as a fully focused tobacco company. I had a chance to look at your balance sheet for the first time without the Kraft complexity and I have a couple of questions. First of all. It looks like your good will is really quite light and even with the acquisition of some foreigner two years ago. I would have thought you would have built more good will then you show and I'm curious to where the good will and then amortization relating to it will end up? Where it is?

There's no amortization on this good will. The increase that you see there from the end of December to the end of the quarter was basically good will as a result of the Lakson acquisition. And the base number you see in December in the balance sheet is most of that is [important].

I see. That would explain it and to the cash and various cash flows into the Company from released escrow funds where do we stand on the process of recovering funds from litigation for the completion?

Well the main one we're waiting for is the return of the angle bond, which, together with the various pieces about $1.3 billion and right now it's expected that it will come in later this year.

Thank you. And then just a quick update on litigation prospects and prospects for moving forward with the F.D.A. proposal.

We don't really know where the FDA whether it's going to pass or not. Obviously, if it passes, it will bring predictability and clear standard to the tobacco industry in the United States and I think it will be good for everyone, consumers and manufacturers alike and various other stake holders in the tobacco industry, but it's impossible to predict how it will move forward.

Thank you. Progress under way in southern district?

Obviously I'm not going to comment that, Tom.

Okay. Thank you, congratulations.

Thank you.

Thank you your next question is from Phillipe Goosen of Credit Suiss. Please go ahead.

How are you today?

Hi, Phillip.

Wonderful a few questions here my side as well. First regard to Europe, Dinny. Can you give us an update with regard to your current thinking with regard to the challenges of the minimum referenced price over there.

Yes. As you know on the MRP there are four countries currently which have the minimum reference site regulations Austria, France, Ireland and Italy. And recently, the EC initiated proceedings before the European Court of Justice against France, challenging the MRP or the Minimum Reference Price and I believe oral arguments are expected sometime in the first half of 2008 and we can probably expect a decision from the European Court of Justice sometime in 2009. Meanwhile, the Commission is undertaking a review of the current excise tax directive as a whole, as it is required to do I think every four years. Last week the Commission opened the public consultation period on this review and published a document requesting comments from the public on proposed changes to the directives. The commission has highlighted, among other things the question of whether the directives should be amended to provide member states with more flexibility to use tax policy to address public health issues, including the growth-growing market in cheap cigarettes. And so that's really the status with the MRP. We'll just have to wait and see how these things unfold.

My second question, Dinny. In the last earnings call from Carolina Group, reference was made to an increase in the amount of cigarettes in the wholesale channel and into basin of the December price hikes. If you then combine it with the somewhat disappointing shipment volume of your sales in the fourth quarter could you give us a feel for if you believe there is still excess capacity in the wholesale channel and how long that would take to make its way through the system?

No, I think by now most of the excess inventory is depleted.

Okay. Next question, Dinny, obviously with the Gallagher acquisition now completed, do you expect any changes to JT strategy as it relates to Russia and how you would react against that if need be?

I think, Phillip, you'll have to ask JT that question but I will tell you that will remain as competitive in Russia as we have always been. We are used to this type of competition, including consolidation by other companies and we've managed our way, very successfully through that, and I see no problem going forward.

And the Federal excise tax in the U.S., what's your thinking. Is this going to make it through the system this year or it's just going to stick with some proposals out there as part of the budgetary process?

Your guess is as good as mine on that Phillipe, it -- there is something in a senate bill at a very preliminary stage at this time. I think it would be very difficult to make any prediction.

Just a final question if I may this morning. One of your competitors in Europe has again stated that they see on going opportunities for synergies, cost reduction, et cetera. I know this is a question that's come up this earnings forum as well with Altria. Any color you can provide in terms of -- I know you always look at opportunities to reduce operating expenses, but can we see at some point in time, like a more accentuated effort to improve margins, both at the PM USA and PMI level in.

I think one of the things I'll say, Phillipe, we're very consciously obviously of productivity, improving productivity and keeping costs under control and reducing costs. We don't talk about it as much as our competitors do. But I can tell you that with PMI, for example, is taking initiatives in a number of areas, including the clustering of manufacturing plans, centralized purchasing of materials and centralizing back office operations, plus a number of initiatives in -- in the IT area to make the whole operation much more efficient. We've already started taking some charges as a part of implementing these initiatives. You're going to start seeing the benefits from these initiatives later on this year and certainly in 2008 and much more so in 2009. I think the same thing applies to Philip Morris USA and they're going about it in a slightly different way but once again you're going to see improved productivity in Philip Morris USA. In net, let me tell you that you will see very tangible results in the area of cost savings and productivity. It's just that we don't want to make predictions and take positions before you actually see the results.

Great. Thank you so much, Dinny.

Thank you.

Thank you. Your next question is from Erik Bloomquist of JP Morgan. Please go ahead.

Good morning, Dinny.

Hi.

A couple of questions on markets then. With respect to Japan, and the overall industry market volumes can you tell me what PMI's outlook is for the industry volumes and secondly with respect to Japan, what the prospects are in PMI's view for a further excise tax increase down the road.

I think obviously in the first quarter, the market declined 5.9%. Close to 6%. We expect that for the full year 2007 -- the market's going to decline somewhere around 4.5%. We're hoping obviously that our decline is going to be a bit lower then that and therefore we're going to grow our share a bit in Japan. As far as the excise increase is concerned, I don't think there's any expectation this year of an excise increase in Japan, but beyond that again, your guess is as good as mine.

Okay and then just following on that, with respect to the volume decline. So we should expect then in Japan that the volume decline would be most pronounced in Q1 moderate as we anniversary the excise and price increase.

That's exactly right.

Secondly, then, with respect to Spain, if you could give us more color on the rest of this year, particularly with respect to Marlboro share. It seems to me that's something we could expect to improve, is that a fair assumption.

Marlboro's share in the first quarter was I think down about a full percentage point because that was because it a unfavorable comparison to last year where we had lowered the price of Marlboro in the first quarter and got that bump between the middle of January and end of February in Marlboro's market share. Obviously this year we didn't have that benefit. In fact, we took up the price from $2.75 to $2.95 there was that unfavorable comparison, but despite that Marlboro's holding pretty well and, in fact, in March it's gap versus last year's market share gap had narrowed so I think it's going to do pretty well as the year progresses and as people and consumers get used to the new price.

Overall market share in Spain then should be stable to improving through the rest of the year?

I think that's a very, very fair assumption.

Okay, terrific. And then on France, is it a reasonable to assume we might see a price increase or an excise tax led price increase post to presidential election. Any comments you can give us on that?

As always we sort of avoid talking about pricing and I'm going to follow that norm right here.

Okay, but would it with be fair to assume that the situation in France post to presidential election would be a good situation in one in which one might increase price.

I'm not going to answer that Erik,.

Fair enough. Lastly on PM USA with respect to the increased promotional. Could you comment on which segments that is in is that primarily in the menthol segment and is that something that we should expect to persist through the rest of the year?

It was not just in the menthol segment. It was in non menthol segment also. PM USA has its planned competitive response to the situation as it develops and beyond that I'm not going to be more specific.

Okay. And is there anymore commentary you can give us on the adjacency products like TaBoca. Might we see that roll out nation wide in the second half.

I can't address that except to say once again that, we're fully committed to our adjacency strategy and you're going to see action as the year unfolds. Okay. Terrific, thank you. Thank you.

Thank you your next question is from David Ireland of ABM.

Good morning, two questions from me. The first one, [inaudible] the beginning of the quarter your demanding criteria on acquisitions I recorded [inaudible] on January 31st that PMI has a prevent attractive pipeline of acquisitions I wonder if that still held good?

Yes.

Yes. Okay. The second question could you say whether your adjacency strategy is aimed solely at the smokeless category or could we ever see Altria becoming more interested in other tobacco products like [roll-your-own] or cigars.

There's no option that's off the table. We cover the whole spectrum of non cigarette products.

Perfect. Okay. Thank you.

Thank you. Once again, media representatives on the call will also be able to ask questions, following the conclusion of questions from the investment community. In order to ask a question or make a comment please press the star key followed by one on your touch-tone phone. Your next question is from Ann Gurkin of Davenport.

Good morning, Dinny. A couple questions starting with China can we get an update on the China partnership, are you distributing brands in Europe for them? Kind of where are we.

Obviously, the China initiative is slower then we had originally estimated but we had always predicted that the China initiative would take time and that it was a long-term -- it was a long-term plan for China and we're working on both the joint venture as well as the license manufacturer of Marlboro. There have been a few unexpected hurdles in -- that we've had to overcome but our objective be is very much to continue both on the JV front, on the license front and hopefully we'll see some results this year.

Okay. Secondly with the number of smoking bans in pubs and bars and Europe is there a momentum or movement you think to approve or opening up smokeless tobacco in Europe? Are you hearing anything?

Nothing more this afternoon I've read in the media which I'm sure you read also, in some quarters there is consideration being given to this. But I really don't know where this stands as far as internal EC determinations are concerned.

What do you think is the biggest hurdle to getting that approved?

Like all of these things it requires agreements from a number of people and something as significant as this obviously is going to take time.

And lastly can I get update on White Stick volume in Indonesia?

White Stick volume in Indonesia, it is continuing to decline.

In line with your expectations?

Yes.

Okay that's great,. Thank you.

Thank you, your next question is from Bonnie Herzog of Citigroup please go ahead.

Hi Dinny, can you hear me.

Yes, I can, Bonnie, how are you.

I'm fine, sorry about that earlier. Lots of questions have been asked. I'm going to be very short given the time. I know somebody had asked about your acquisitions and I know you don't want to say too much but you did mention that certainly any acquisitions you pursue you want them to be economically viable. Could you give us a little bit more color on the exact metrics you look at or consider when you're evaluating potential acquistion,for instance hurdle rates, do you need to be accretive in terms of EPS in the first year, things like that. Is there anything that you can provide for us on that front?

Unfortunately, no, Bonnie.

You can't say your hurdle rates?

No. We have solid metrics and discipline internally but these are purely internal, okay.

In terms of PMI clearly your over index in the premium segment which is a positive and you've done well internationally and I'm wondering if talking with you over the last couple of years. I have the impression that you're going to be pushing little bit harder in the mid price segment or spend a greater focus of your time and effort in that area to penetrate new markets is this something that is true and when can we expect to see more action on this front.

You're already seeing more action our initiatives in all price segments mid price, low price segments in a number of markets already -- slow. At the same time we continue to focus on the premium segment because the margins are higher there and we've got some terrific premium brands like Marlboro, Parliament and Virginia Slims but at the same time we're doing well with brands like Chesterfield and Murratti and we've got very good brands in the low price segment where obviously the competition is the most intense, but just to address your original question, we are already present in all these segments.

No, absolutely, I'm aware of that but don't you think over the next several years your mix will shift. That's a way to grow your top line and to enter new markets is that a fair statement?

That's a fair statement. Our mix is already shifting and it has been shifting for the last few years and that's the only way we're going to be able to grow our volume.

Correct. Last question. Marlboro Smooth. You said it met your expectations. Can you tell us what the retail market share is now? And where that market share you think may have come from and what you think the rate on that brand.

No, I can't, but I will tell you it is doing well.

You can't give me the market share on Marlboro Smooth.

No.

Well thank you you all for you time. Thank you.

Once again the call is open to any questions from media representatives. In order to ask a question or make a comment please press the star key followed by one on your touch-tone phone. Your next question is from [Maury] [inaudible] please go ahead.

Good morning. I have a question on Japan. How much is Marlboro's market share point an increase or a decrease?

Marlboro share in the first quarter was about 9.9 points, which is slightly down on the first quarter of last year.

Why the down market share?

Well, I think one of the reasons obviously is that the price increase of the middle of last year in July, 2006 took Marlboro above 300 Yen a pack and that obviously has had some impact.

That helped. Thank you.

Okay.

Bye.

Bye.

Thank you. There are no further questions.

Okay. Well thank you very much for joining us on this call this morning. Any follow up questions please get in touch with us here at Altria Investor Relations and have a great day. Thank you.

Thank you. This concludes today's Altria conference call. You may now disconnect.