菲利普莫里斯國際 (PM) 2008 Q1 法說會逐字稿

Good morning and welcome to Philip Morris International's first quarter 2008 earnings conference call.

Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session.

(OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications for Philip Morris International.

Please go ahead, sir.

Good morning and thank you for joining us.

Earlier today we issued a news release which contained detailed information on Philip Morris International's 2008 first quarter results.

If you do not have a copy, you may access one on our web site at our website at www.pmintl.com.

Following the completion of the spinoff, historical basic and diluted earnings per share amounts have been recalculated based on the actual number of shares distributed by Altria Group, Inc on the distribution date.

As a result, we have provided in today's news release a reconciliation of 2007 reported results to 2007 pro forma adjusted results by quarter and for the full year on Schedules 5 through 9.

Accordingly, our 2008 EPS growth rates will now be compared to $2.79 per share versus $2.78 per share.

Today's remarks contain forward-looking statements and projections of future results and I direct your attention to the Safe Harbor statement at the end of today's news release for a review of the various factors that could cause actual results to differ materially from projection.

It's now my pleasure to introduce Hermann Waldemer, Chief Financial Officer for Philip Morris International.

Hermann.

Thank you, Nick, and good morning everyone.

It is a great pleasure for me to host first conference call of the newly independent Philip Morris International.

We are very excited about the opportunities that lie ahead and we are delighted to meet many of you during our road show in March.

In our March 11 presentation, we shared with you our longer term annual growth targets of 4 to 6% growth in net revenues with 1 to 2% volume expansion, 6 to 8% in operating income growth, and 10 to 12% EPS growth rates on a constant currency basis.

In January, we issued EPS growth guidance of 12 to 14% for 2008, off a base of $2.78.

Since then, we have witnessed further decline in the value of the U.S.

dollar and, accordingly, we today increased our EPS guidance to reflect our business momentum and current exchange rates.

Our 2008 full-year EPS guidance now stands within the range of $3.18 to $3.24 as a result of growth of 14 to 16% from a revised pro forma adjusted base of $2.79.

This new guidance includes the marginally positive impact of the acquisition of Interval and other OTP trademarks from Imperial and also includes an increase in brand-building expenditures in some key markets to accelerate growth.

Let me now share with you our strong first quarter results.

Diluted earnings per share were $0.89, up 29% or $0.20 per share.

Of this increase, $0.11 per share reflects the strength of our business in favor of the currency accounts for the balance of $0.09 per share.

Net revenues, excluding excise taxes, were 14.1% higher at $6.3 billion.

Representing an increase of $781 million.

After adjusted for currency, net revenues increased by 5.4% primarily reflecting improved mix and higher prices.

Net revenues increased in all four regions and in the vast majority of our top 25 OCI markets.

Reported operating company's income, or OCI, was 31.7% higher at $2.8 billion in the first quarter.

On the like-for-like basis, excluding the favorable impact of currency, acquisitions, and the U.S.

duty-free business, OCI increased by 17.5% compared to 2007.

This very positive result was driven by improved volume and mix in all the regions except EU.

Higher prices, particularly in the EU EEMA reduced administrative costs and the expected skew to the remainder of the year in the timing of some promotional marketing and overhead expenses.

OCI growth net of currency was very broad based across most of our markets with particularly strong growth recorded in Indonesia, Italy, Korea, Mexico, Poland, Russia, Turkey and Ukraine.

PMI cigarette shipment volume increased by 2.2% or 4.6 billion units to 218 billion units driven by Argentina, Egypt, Indonesia, Korea, Mexico and Russia as well as by the positive impact of our acquisitions in Mexico and Pakistan.

Excluding acquisitions and the U.S.

duty-free business, first quarter volume declined by 0.5%, or 1.2 billion units, due mainly to the continued overall market declines in the EU and Japan.

In terms of market share, we made progress in many of our top 25 OCI markets including Argentina, Egypt, Mexico, the Netherlands, Russia and Ukraine.

In Poland and Turkey, while we lost share in the lowest priced categories, we improved our mix and substantially increased our profitability.

Marlboro shipment volume declined by 1.2% to 77.3 billion units.

With growth in EEMA, Asia and Latin American regions offset by a decline in the EU.

On a like-for-like basis, excluding the U.S.

duty-free business, Marlboro volume declined by 0.6%.

Outside the EU, Marlboro volume increased by 3.7% driven by strong performance in Argentina, Indonesia, Korea, Mexico, Russia and Ukraine.

Marlboro filter plus, Marlboro Intense and new menthol variants are helping to re-energize the brand in key markets.

We continue to work on the repositioned L&M in eastern Europe and are encouraged by the positive developments in the renewal of the brand smoker base with an improved age and gender profile.

Nevertheless, L&M shipments continue to decline in the first quarter, though volume trends remain positive in the EU region.

As we explained during the road show, the repositioning of L&M in eastern Europe is not a short-term exercise but will take time before positive results are reflected in volume trends.

The decline in L&M in eastern Europe has been largely offset by the very strong performance of the higher margin Chesterfield which grew by 18% during the first quarter.

The brand is doing particularly well in Russia and Ukraine, but it is also performing strongly in such market as Italy and Spain.

While our other key international brands continue to perform strongly, I would like to highlight the continued positive development of Parliament.

Volume increased during the first quarter by 19% thanks to Korea, Russia, Turkey and Ukraine, and we are further expanding the brand geographically to build on this momentum.

Parliament, with its unique taste and defined packaging, occupies a special place in our portfolio.

Positioned in many markets at the premium price to Marlboro and generating superior margins.

Let me now comment on key specific developments in our four business segments.

I will begin with the EU region which remains PMI's most profitable region and was the single largest contributor to PMI's reported OCI growth with an increase of $279 million to $1.3 billion, driven by favorable currency and higher pricing, partially offset by negative volume mix.

Excluding currency, OCI in the EU region increased by 9.8%.

OCI was only down in one of our most important markets in the EU region, namely France.

Their volume share decline, we believe temporarily, as a result of Marlboro moving above the round the price point of 5 Euros.

I would like to highlight in terms of positive OCI developments in the EU, our continued profitability growth in Italy, our strong recovery in Spain and markedly higher OCI in Poland.

The strong profitability was achieved in the context of a rather extraordinary estimated total regional segment market decrease of 5.5%.

This decline was driven by higher retail prices across the region, the implementation of further smoking restrictions in France, Portugal and most German states, as well as trade inventory movements in the Czech Republic.

The results in the EU during the first quarter of 2008 highlight our ability to successfully grow profitability in challenging circumstances.

PMI's U.S.

shipment volume reached 62.8 billion units, a decline of 3.9 billion units versus 2007, largely reflecting the overall market decline.

PMI's overall estimated market share reached 38.8% in the first quarter as positive developments notably in Belgium, Italy, the Netherlands and Spain were more than offset by share declines in France, Poland and the impact of the aforementioned trade inventory movements.

Marlboro share was down slightly during the quarter though there was sequential improvement compared to the 2007 fourth quarter share.

Turning to key markets, our strong performance continued in the first quarter of 2008 in Italy.

Our market share was 0.5 points to 54.7, driven by Chesterfield, Merit and our locally heritage brand, Diana.

Partially offset by a decline in Marlboro share, which we are addressing through extensions such as the recently launched Marlboro compact, a product similar in concept, concept to the Marlboro Intense launched in Turkey but lighter in taste.

In Germany, total industry shipments were down 2.7% in the first quarter and PMI's reported share declined by 0.2 points; however, adjusted for competitive inventory changes, we estimate that our cigarette share was up 0.9 points with L&M now gaining share predominantly from other low-priced brands rather than consumer downtrading.

We also performed strongly in the fine cut segment with $0.25 a share of over 12% largely driven by innovation.

In Spain, the total market was up by 5% following weak January 2007 sales driven by a tax and price-related buildup of straight inventories at the end of 2006.

Our market share was slightly higher at 31.8%, behind the strong portfolio across key price segments with Marlboro and Chesterfield gaining share.

Profitability is also recovering strongly.

As mentioned, our business in France has come under pressure after increased recent retail prices last year.

However, PMI's total market share has sequentially stabilized compared to the fourth quarter of 2007 thanks to the strong performance of Philip Morris Filter Kings.

We believe that over time consumers will adjust to the new pricing environment and we are taking steps to further enhance the equity of Marlboro.

We are also reinforcing our position in the French fine cut market through the acquisition of Imperial of the segment Interval.

In the EEMA region, we achieved excellent results in the first quarter, helped in part by a favorable comparison to the 2007 first quarter.

Net revenues, excluding excise taxes, rose 20.8% and grew 11.8% excluding currency.

Shipment volume in EEMA increased by 2.9% to 75 billion units as we gain volume and market share in the key markets of Russia and Ukraine, continued our growth momentum in Egypt, and reinforced our penetration of two markets which we have entered more recently, namely Algeria and Bulgaria.

Reported OCI in the EEMA region increased by $225 million during first quarter to reach a level of $792 million driven by higher volume and pricing, a positive product mix and favorable currency.

This represents a quarter-on-quarter growth rate of 39.7% and 31.6% excluding currency.

These results reflect increased profitability across all our eastern European and Balkan markets as well as other geographies, such as Egypt and Turkey to name just two.

Russia shipment volume was up 7.8% in the quarter thanks to a favorable comparison with a weak quarter in 2007 and our improved underlying business performance.

Both net revenues and OCI expanded at the fast pace.

Our high-end portfolio of Parliament, Marlboro, Virginia Slims and Chesterfield and our infrastructure in (inaudible) position us very well in terms of business fundamentals at the time when the Russian economy and consumers in large cities are benefiting from continued economic growth.

Marlboro recorded double digit volume growth during the quarter and its market share was up.

We are particularly pleased by the progress of the Marlboro filter plus which we introduced in key cities during the second half of 2007.

The brand has already achieved the market share in Moscow some 1% and consumer research indicates a very positive impact on the perception of the whole brand (inaudible).

The key driver of our continued volume growth and share expansion in Ukraine was Chesterfield, which grew volume by over 30% in the quarter.

Overall, PMI's quarterly share reached a record level of 34.7%.

Our profitability in Turkey surged over 30% during the first quarter thanks to higher pricing and improvement in our brand mix.

The share of premium brands in our portfolio was up from 39% in the first quarter of 2007 to 44% this year.

Parliament is performing very well with volume up over 25% and a gain of almost one market share point.

Egypt also merits special attention as it is an excellent illustration of PMI's ability to grow volume, share and profitability in emerging markets.

The market has grown at 2% a year since 2002 to reach 75 billion units last year.

Our portfolio is made up of premium-priced Marlboro Merit, mid price L&M and low-priced Next.

All four brands are performing well which enables us achieve first quarter market share of 13.5% and the share of the international segment in excess of 75%.

Our business in Asia has been (inaudible) by acquisition and the robust performance of our brands in such markets as Indonesia and Korea.

This has helped to offset the challenging environment in Japan where the overall market is declining, pricing flexibility is limited, Marlboro share has lagged our growth expectations and Lark has been under pressure.

Reported OCI in Asia was up by a strong 24.5% in the first quarter to $584 million, driven by favorable currency, higher prices and positive volume mix.

Excluding currency and acquisitions, OCI increased by 17.5%.

There were positive developments in nearly all markets led by Australia, Indonesia and Korea with the key exception being Japan.

Net revenues, excluding excise taxes, were up 10.2% and 6% excluding currency.

At 57.1 billion units, shipment volume was helped by the 5 billion unit contribution of Pakistan.

Shipment volume was up 10% and 0.4% excluding acquisitions.

PMI's market share increased in Korea and Thailand and remained stable in Australia and declined in Japan, Malaysia and the Philippines.

Marlboro volume increased in Asia during the first quarter and Parliament and Virginia Slims also showed positive trends.

The Japanese market declined by 3.6% in the first quarter, but is down 4.3% on a 12-month moving average basis.

We are expecting this trend to continue during the year and we might see some temporary disruptions from the introduction of age verification systems from vending machines.

PMI's shipment volume in the first quarter was down 4%.

Our 23.9% share during the first quarter in Japan was off 0.8 share points primarily do you to Lark.

We have the programs in place to correct this going forward though we expect the recovery to be gradual.

We are addressing Lark through the rollout initially in the eastern part of Japan of Lark Classic and Lark Menthol X was launched during the quarter with encouraging early results.

The brand family is being supported as of May with a revamp marketing campaign.

In addition, Marlboro Ice Mint is performing well in the menthol segment and we have another initiative in the pipeline in order to accelerate Marlboro's growth going forward.

We are confident that all these initiatives should help grow our market share in Japan.

In Indonesia, shipment volumes increased by 5.6% in the quarter and profitability was strong, though our market share was off slightly to 28%.

Marlboro [Classic] continues to perform well and provide an overall boost to the whole brand family.

Marlboro's share in Indonesia increased by 0.3 share points during the first quarter to 4.2%, and we have launched A Volution, the first offering in a super slims form.

Korea was the first market where we introduced Marlboro filter plus.

It continues to provide a stimulus to the overall franchise.

Marlboro's share total up to 4.5%.

Parliament and Virginia Slims are also gaining and late last year we introduced a local heritage brand called [Lim].

Let me conclude my regional review with Latin America.

At $152 million, reported OCI was up 72.7% and 54.5% excluding currency and acquisitions.

This increase in profitability is attributable to higher pricing, the impact of acquisitions of local trademarks in Mexico and positive volume mix developments in Argentina and Mexico partly offset by difficult trading conditions and distortions related to the January 2007 tech structure change in Colombia.

Net revenues, excluding excise taxes, increased 10.8% and 6.9% excluding currency and acquisitions.

Shipment volume was 5.6% higher at 23.2 billion units, but essentially stable after taking into account the contribution of 1.3 billion units from our acquisition in Mexico.

On a regional basis, Marlboro shipments increased by more than 5% to over 10 billion units after the brand gained share in Argentina, Colombia and Mexico.

Mexico is our most important market in Latin America.

Our profitability was up substantially during the first quarter as we gained share, achieved higher pricing, and benefited from our recent acquisition.

Our quarterly share reached a record level of 67% with Marlboro, Benson Hedges, and (inaudible) all growth.

We also successfully expanded our business in Argentina.

Our share reached 70.7% in the first quarter as both Marlboro and the Philip Morris brand continued to perform well, thus helping to drive double digit increase in profitability.

To sum up, PMI achieved very strong first quarter results by a number of measures.

EPS growth was 29%.

Net revenues, excluding excise taxes, increased in all four regions and were up 5.4% excluding currency.

Operating company' income was also up in each of the regions and was up a strong 17.5%, excluding currency, acquisitions, and U.S.

duty-free.

Our innovation pipeline is beginning to generate encouraging results with more to come in the months ahead.

The acquisition of Interval and other OTP trademarks will strengthen our position in a growing and profitable category and will provide us with an attractive economic return.

We will begin our two-year, $13 billion share repurchase program in May.

While we expect our marketing and promotion spending notably behind new initiatives, will be skewed towards the remainder of the year, we are confident in our ability to deliver the 2008 EPS growth rates outlined in our revised guidance today.

We have in place the strategies, the brands, and the people.

Deliver against our commitment to achieve superior returns for our shareholders.

That concludes my prepared remarks and I would be pleased to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question is coming from Judy Hong with Goldman Sachs.

Please go ahead.

Hi, good morning, Hermann.

Good morning, Judy.

My first question is just in terms of your operating growth behavior in the first quarter.

I mean clearly we saw a huge operating leverage with constant currency revenue up 5.4% but operating profit up close to 17%.

Can you just talk a little bit about what is -- what's driving that, whether it's the timing of some of the cost savings?

You mentioned the promotional spending being more skewed to the back half of the year.

Can you just quantify how much that really affected the first quarter and how we think about that for the remainder of the year?

Okay.

It's -- of course, as you say, I think it's a combination of all of the above.

Yes, we had pricing in the quarter.

We had most importantly improving business fundamentals in our overall business I think in all of the four regions as you can see by the growth in both net revenues and also operating companies income.

There is some cost skewing towards the remainder of the year.

Spending skewed towards the remainder of the year.

Our cost measures that we have taken essentially all across the categories are bringing results in as well.

So it's all of the above.

So it's an extraordinary quarter, but also if you take it for the year, as expressed by our new guidance, we are set for stronger for the year.

Okay.

Just -- following up on that, just in terms of what is embedded in your guidance as far as the currency is concerned, how much impact are you looking at now for the remainder of the year and does that assume that the currency stays at the same rate today or how are you looking at that number?

I think it's best if I describe to you a little bit the elements that went into our new guidance.

What did we consider in there?

It's actually four elements that went into our consideration.

The first one is, of course, currency and the favorable currency, tailwinds that we see.

However, I would also like to say it's just April 23 right now and there are a couple of months to come throughout the year.

The second point really is our business momentum, improved fundamentals and our business momentum that we see really across our businesses and we can go later into specific markets how they are doing.

The third element is also that we want to do some reinvestments into some of our key markets.

There is also an opportunity to do so and we will do that in order to accelerate future growth.

So there is an investment part going into the equation, if you like.

And the fourth element is really some expenses, as I said, skewed toward the remainder of the year.

Then we take all of those four and this is how we come to 14 to 16% EPS growth for the year.

So it's a mixture of the four elements.

Okay.

And then just my final question.

Looking at the EU region, can you quantify how much the trade inventory distortions in Czech and Germany impacted your shipment numbers in the first quarter?

And secondly, are you surprised at all by the magnitude of the overall market decline following the price increases?

Okay.

Let me start really by giving some color on the EU market decline.

There is really one effect in there, which is enormous, which the one of the Czech Republic.

If you take out the total market decline of 5.5% in the EU, the Czech effects then you are down to 1.9% and you are back to what we believe going forward in the mid term is a market rate decline for the EU region between 1 and 2%.

So the Czech situation maybe I should describe a little bit what is going on there because it's such a specific and a bit strange situation.

Total market in the Czech Republic in the first quarter is actually down by a dazzling 75%.

I mean, this is a strange situation.

It is actually what I would call a prime example of undesired effects of a somewhat inconsistent fiscal policy in a country.

You don't have efficient forstalling of the regulations in the market, which means you can have old tax, old priced products in the markets with the duration anywhere between 6 and 12 months beyond the date of an excised tax change.

That doesn't make a lot of sense.

It, of course, also has competitive consequences in such a market.

The smaller you are, the higher your durations tend to be because you have smaller volume so on your brands you can have longer duration.

You have a certain disadvantage if you are big like we are in the market.

So these are all the distortions, but if something is distorted at such a magnitude, I think that also can give us the confidence that this is bound to change.

It might need a transition.

It might not change in one goal, but it's bound to change.

So that is really the most important point to get back to the EU market decline.

It really has had an impact there.

Okay.

Thank you, Hermann.

You are welcome.

Thank you.

Your next question is coming from Filippe Goossens of Credit Suisse.

Please go ahead.

Good morning, Hermann, and congratulations for a blowout quarter.

We were very pleasantly surprised here.

Thank you very much, Filippe.

A couple of housekeeping questions.

First, if I may, Hermann, first of all, do you have any color in terms of what CapEx and free cash flow were for the first quarter?

Well, we are on target for our free cash flow targets for the year.

So there is nothing unusual.

We are perfectly within the guidance that we have given before.

Okay.

And can you give us how much of the costs cutting was already realized in Q1?

We, of course, see the benefits of our measures, administrative, procurement, productivity, everywhere.

Going forward, I mean, what we intend to do is actually -- I mean to give an update on our cost programs, say once a year, not really every quarter that probably would be just too much of a detail and you have the swings between the quarters but really to the essence of your question, are we on target for our cost savings for productivity improvement?

Yes, we are.

Okay.

Then my real question is here, Hermann.

Number one, in terms of the reinvestment that you refer to later on this year, can you give us a little bit more specifics in terms of what you plan to do and the dollar impact?

Okay.

I mean, of course I have to be a bit careful here for competitive reasons.

Let's agree that I give you one example which is a pretty obvious one, which is Japan.

We all remember the situation in Japan that we had the Marlboro takeback at the time.

We had the distribution focus of our company at the time.

There was tremendous profitability increased at that time was driven by that.

We somewhat missed out on the marketing part.

We have a new management in place that is really focused on the marketing and on the refitting of the innovation pipeline.

That's really what we want to support.

So if you like in Japan, I would say, we have put both the human and the financial resources to correct the situation there.

And we will invest in where we have our issues.

We have our number one issue in Japan, which is Lark.

There there are two things right now and there's more to come.

There is the launch of Lark Classic out and in a part of the market but that's bound to be rolled out to the entire market.

There is a support by really new campaign for the entire franchise.

There is Marlboro Menthol X launch out there which is performing well.

As you know, the menthol segment is a key segment, a key growth segment in the Japanese market.

We are out there also on the Marlboro side with Marlboro Ice Mint.

We have more to come there.

This is a very competitive segment so I, of course, won't say yet what exactly it is going to be, but there's more to come on our franchise.

So I think these are the areas, the problem areas if you like, and this is, of course, and also where the money goes.

Last point maybe to mention which is that the implementation of age verification on the vending machines, that certainly will trigger some changes in the consumer purchasing pattern and that also needs support in terms of sales force distribution, but also in terms of money.

So that will be an example of where that reinvestment money goes.

Maybe just as a follow-up on Japan, Hermann.

Given the secular strengths in consumption declines, do you see any opportunities on the smokeless side over there?

Yes, look, as highlighted by our acquisition of Interval we consider ourselves to be a tobacco company.

We always look at all alternatives, but I think for now we all should concentration on the problem at hand, which really is the decline of Lark and the missing growth.

Marlboro is stable.

The missing growth of Marlboro in Japan, that's where I think we should focus and we will focus on that.

Okay.

The next question, Hermann, if I have my numbers correct using your $0.46 in dividend for the quarter, if I annualize that and I look at the share price, obviously the share price will be up this morning.

I'm coming out with less than 4% dividend yield, which puts you at the lower end, particularly compared to the U.S.

players out there.

When can we expect the different pay outs to go up, particularly if you look at the very strong balance sheet even after the stock buybacks?

Okay.

There I think we have to say that the facts are we have an annual rate of 184.

We have $0.46 for the quarter.

The other fact is that we have a payout ratio of 65% and the rest is entirely up to the board and is a board decision, including the timing.

When is the next board meeting, Hermann?

There are seven board meetings throughout the year.

And if you refer to the Altria practice, they had that in August.

That doesn't mean anything on PMI.

This is a new board and the new board will decide that question in its entire discretion.

Okay and then just my final question if I may, Hermann.

Obviously, you have been a big beneficiary of uptrading in emerging markets.

Now let me be for one second a little bit more skeptical.

If people are concerned about the weakness in the U.S.

spilling over to other markets and you would see a slowdown in the growth rates in emerging markets, is there a risk that this whole uptrading trend may slow down or in a worst case scenario, actually reverse?

Okay, there are two elements in here, I think in your question.

I mean, first one is that I believe we are in a wonderful position with our premium secured portfolio to benefit from uptrading in emerging markets.

So that is a positive for the entire company.

Now, of course, it's driven by also the question of raising food prices and so on and so forth, could that have eventually some impact on the disposable income of consumers in emerging markets?

Yes, that cannot be excluded.

I mean, that is happening as we speak in Indonesia, but I really have to tell you, we don't see any impact on our brands, on our sales from that right now.

Okay.

Great.

Thanks a lot, Hermann.

You are welcome.

Thank you.

Our next question is coming from Chris Growe with Stifel Nicolaus.

Please go ahead.

Thank you.

Good morning, Hermann.

Good morning, Chris.

I had a couple of questions.

My first one is to go back to the question that Filippe had asked about cost savings.

Is it reasonable to assume that you in the year would achieve about a third of those which you outlined for the three-year program?

It is a three-year program.

We have started the activities which are the basis for the ability to generate those savings already last year and the year before.

So these are ongoing programs.

Overall, yes, we will deliver that at a constant pace over the years.

It's coming in the progress -- the programs are on track everywhere.

Okay.

And then just to go back to a number you gave in your remarks.

I think you said Marlboro volume outside of the EU is up 3.7%, is that correct?

Yes, that's correct.

That's obviously a very big performance.

I'm curious within that, you've got a lot of new products focused on Marlboro.

Are you seeing a lot of benefit from those new products or is this more just sort of base business growth with a little kicker, if you will, from the new products?

The new products and the refilling of the pipeline are really key to the innovation strategy.

If you talk filter plus, if you talk intense, ice mint, or if you talk Marlboro in Indonesia, these are on one side new offers extremely attractive for the consumers.

That's one thing.

But you also do have a halo effect driven by innovation on your entire franchise.

So it's good from both perspectives.

And if you look a little bit into the region or into the markets, go to Indonesia.

There you have Marlboro (inaudible) doing very well.

It's actually, we are in the process of expanding distribution for the entire territory of Indonesia.

It's doing well.

And at the same time, we see a renewed growth for what we call their Marlboro light, Marlboro traditional.

Korea, a little bit of same thing, Marlboro filter plus.

Marlboro itself also growing to 4.5% market share.

Russia/Ukraine, I would again say filter plus helping in that growth, but also again re-energizing the franchise.

You go to Mexico and here you have Marlboro lights who is doing very well in the market.

So it is both.

It is good.

It is generating volume by itself as a line extension, but it is bringing new value, energy to the entire franchise and that's how we go about it.

Okay.

That's great.

The last question I have for you is just on your marketing reinvestment, the incremental investment.

Is that primarily focused on your problem markets or is it more about generating growth in some of the faster growing markets?

Are you trying to fix some problems or trying to accelerate growth in some markets with that money?

It is both.

We don't only want to fix the Japanese problem, we also want to grow it.

So it's both and this is how you go about investment where you have problems, but also maybe even more importantly where you have growth opportunities and actually Japan is an example for both.

Okay.

Great.

Thanks for your time.

Thank you.

Our next question is coming from David Adelman with Morgan Stanley.

Please go ahead.

Good morning, Hermann.

Good morning, David.

A few things, Hermann, first of all I think in '03 when there was an conscious decision to increase investment internationally, the company quantified the spending.

Are you willing to do that that year?

I'm afraid I'm not willing.

Okay.

Secondly, Hermann, broadly speaking, what's the risk that your incremental spending damages some of the competitive piece that's broken out in so many of these markets.

Of course markets are always competitive and our spending is there to improve our situation and that's what we really are concerned about.

And this is what we are doing.

Okay.

But you are not unduly concerned about the response to your higher spending levels?

Look, we do what is good for our company and strength in our competitive position.

I can't answer for the other companies.

Okay.

Also, Hermann, and this was asked before but let me ask it again.

There's such a remarkable improvement in the operating metrics of the company looking at sort of organic volume growth versus local currency, operating profit growth.

Can you go through again, sort of the major dynamics that are resulting in such better performance coming into this year than you enjoyed even in the second half of last year?

I think we will see here the key element.

There is a beep now in the line here.

Can you hear me all right?

I can hear you fine.

Okay.

Look, what we see here, I would say, is the confirmation of what we have said during the road show where we believe we are going and where we believe we can deliver and we will deliver.

I mean, there is an overall improvement in the business fundamentals.

We did not see really the disruptive type of excise increases that triggers all the undesired consequences that these do.

So we see that governments are more conservative here, if you like, or applying those increases in a more rationale manner.

So that's -- that's what's working well.

That is an important element.

On the other side, I would say while we still have a lot of work to do going forward and we are doing that work, you see that our innovation pipeline begins to be filled up.

It is improving and we are getting things out of the gate here.

Still room to improve and we will improve further and you will see more.

So I think these are -- these are main elements and in the emerging markets while we are performing well, we are doing well in terms of market share.

We benefit from uptrading in those markets which is the strength of our portfolio.

Look, as we all know, we have 7 out of the top 15 brands in the world, and even if you look at one of our problems that we clearly have, which is L&M in eastern Europe, yes, we have a problem there and what we have done there, revamped the product, the pack and the campaign.

We are really positive that this is going to show results.

At the same time, and here I come back to my 7 brands out of the top 15, you have Chesterfield and other mid priced brand actually priced slightly above L&M in those markets which is growing tremendously and helping there.

So it's the broadness of our portfolio and the strength of our portfolio that also helps us.

Okay.

Hermann, two last things.

In Japan with the vending change in that market, what is the risk that the business sort of relives the situation in Germany that you suffered through last year, being overshared relative in vending versus convenience stores?

Okay.

There are two elements to it.

I mean first we are not -- over proportionately present in vending share, actually.

Our share in C stores is higher than in vending.

So the second part of the answer is, of course, what will be the changes in consumer behavior and purchasing patterns in the market.

That's difficult to predict.

We will see some changes in some SKUs towards the C stores in the market, to what extent that's difficult to see right now.

But the specific problem we had in Germany we don't have in Japan.

Okay.

And lastly, in Germany, you are lobbying for an increase in the minimum tax excise to 26?

That's certainly something that would make sense.

That is something that I believe the government is considering.

It's, at the end of the day, a governmental decision.

We certainly support it but let's see what the decision is going to be.

Okay.

That will be a nice precursor to a price increase.

My comment, not yours.

Bye.

Thank you.

Thank you.

Thank you.

Your next question is coming from John Fell with Deutsche Bank.

Please go ahead.

Morning.

Good morning.

First thing I wanted to ask about was -- well, some more of the reason in the outside gain, outsize gain and operating income in the first quarter.

It looks to me like first quarter the proportion of marketing and research across the net sales dropped by about 300 basis points versus where it was last year.

I'm just wondering how much of that is cost savings stuff and how much is it due to timing of your marketing budgets?

And what would you expect to happen for that figure for the full year versus last year?

Are we going to see an ongoing decline in that line as proportion of sales for '08 or is it going to be broadly similar?

Yes.

Okay.

There are three things in there.

I mean, of course, there is the cost saving part and there is the second part which is, as we said, some expenses skewed towards the remainer of the year, but there are also some favorable, some favorable comparisons in there to last year that we had a couple of one-timers which we don't have this year.

So it's those three things in total.

And the cost and the cost skewing towards the remainer of the year will, of course, remain throughout the year.

It's just a fact.

Okay.

And as a proportion of sales would you expect that line to be broadly flat or can it drift down because of the cost savings element?

Our cost savings are in there.

It comes back essentially there to the guidance question, I think.

All of these elements in there, there are -- our cost savings in there, our productivity in there, but there are also the reinvestments in there.

If you take it all together, this is what brings us to the new guidance.

Okay.

Thanks.

Second question just on your business model and relationship of the 2008 performance to that, particularly as it relates to volume growth because I think organic volume growth in the first quarter down 0.8%.

You flagged that '08 is going to be a difficult year but you hope to be hitting your 1 to 2% volume target in the future years.

I'm just wondering how you see that as a business and what the reasons for that would be.

Is it because you are going to see a slowdown in the rate of decline in the total European market?

Is it because you are going to accelerate share within EU, or is it because you expect an acceleration of volume growth in the other part of the world?

First, the organic number that you should look to is not minus 0.8, it's minus 0.5.

You have to deduct also there the U.S.

duty-free business which was in our numbers last year and not in our numbers.

Okay.

So it's .5.

It is actually there for perfectly in line for what we said previously, i.e., a slight decline still in 2008.

Going forward, look, we spoke before on different questions about our innovation pipeline and what we are doing for our key brands.

Marlboro, but not only Marlboro, also the other seven.

You can see in the news release we have nice growth rates on a lot of our other brands.

Parliament is doing extremely well.

Chesterfield is doing extremely well.

Virginia Slims is growing.

So there are -- there are good signs for our portfolio and for our innovation pipeline across our brands.

That's what makes us believe that we can improve and will improve market share performance and I would not just link that just to a region.

This is on a market per market basis, but if you like across the world.

The other part of your question is, of course, the question of the market declines.

In the EU, I mean as I said, take Czech out which is really a special situation.

You're at minus 1.9.

You are within the 1 to 2% market decline that we see for the European Union and I believe also if you go to Japan the other important market of where we see declines, I think it's going to be the 2 to 3% that we -- as we said during the road show, I think that's what we see going forward there.

A bit sharp right now.

I think that is going to calm down.

And the -- the share loss that we see in Japan in the last quarter, I mean it did seem to accelerate slightly from what we were seeing at the end of last year.

Is there any particular competitive activity that is causing that or have you taken the gas off lock a bit in advance of relaunching it?

What was the explanation for that, would you say?

Well, to be very frank with you, Lark is a problem.

Our market share loss in Japan is principally related to Lark.

Marlboro is essentially stable and Marlboro is essentially stable.

So it's really Lark where we have the decline.

We are -- we are doing what we believe we have to do, which is skew towards two trends, if you like, one menthol is very important in the Japanese market.

There is Lark (inaudible) where we have done something and then you also have to cover more, let me call it the more traditional, more conservative side of your smoker base, which is not menthol, which is full flavor, that is the Lark Classic and, overall, your performance in the market is also linked to campaigns.

We come up with a revamped campaign for the entire franchise.

So we focus very much on it, but the situation is the situation it is, but we work on it.

We work on it very hard and we believe that driven by what I said before and more initiatives to come, we can turn it around.

Thanks a lot.

You're welcome.

Thank you.

Your next question is coming from Christine Farkas with Merrill Lynch.

Thank you very much.

Good morning, Hermann.

Good morning, Christine.

Just a couple of quick follow-ups if I could.

Your top line growth currency neutral of 5.4%, if we look at your reported volumes of 2.2, suggest real price growth of 3.2.

I just want to understand I'm looking at that correctly.

Given fewer disruptions in the excise taxes, can you talk a little bit about, firstly, what the underlying price contribution was as well as the mix contribution or if that took away?

And, secondly, is that a good formula going forward?

Should we see that kind of amalgamated price mix growth on the top line on a currency neutral basis?

Look, okay.

If you take currency out and really you see that the improvement of the business performance is highlighted by the numbers that you see in the release is actually quite a bit higher than the currency variance, which is only 255 for the quarter.

The business performance, of course, consists of various elements.

It's clear that the pricing variance is an important part of that, and actually that's a positive I would say, but it's also clear that it's not the only part in there.

There's cost as a part in there, but there is also improved performance in there which is expressed by an improvement in the volume mix.

Volume mix is positive in three regions and is negative in one region which, of course, is the one where it's down, is the European Union region.

So that's a bit of parameters in the game here and they all play together.

But, look, I see improvements, if you like, in all of them.

Pricing is important.

That's good.

That's normal.

If you like, we are going to keep on looking at our cost and we will work on our innovation pipeline across the brands which is the volume mix and I think we see some improvement there, we clearly see, actually some improvement actually in the volume mix.

Great.

Moving to two market questions.

Firstly in Russia, there was a nice pickup in market growth there and given some easy comps.

I'm just trying to understand your perspective of what you think a normalized growth rate might be in Russia in the intermediate term.

The Russian market is very difficult to measure, to be frank with you.

It is growing.

To what extent it is growing is difficult.

There is not such a precise measure.

It's one of the emerging markets that is growing.

What is more important for us in there actually is the operating potential that the market has where you clearly can see that starting with Parliament, with Marlboro, also with Chesterfield, where this is, of course, a very attractive market for us.

We are doing pretty well.

You are right also with your comment that we have -- there are some easy comps to the first quarter in Russia.

That's true.

On the other hand, that shouldn't distract us from the point that Russia is a very good story.

Okay.

Great.

Final question, Hermann, is on China.

Can you just update a little bit on the progress there and what you see in the remainder of the year in both the export business as well as Marlboro within China?

Okay, in China, we are really absolutely on track, also compared to what we said during the road show.

So we expect on the domestic market the launch of licensed production produced volume Marlboro in China actually the summer of this year this is going to come.

We are on track on this one.

On the international venture, RGD has been launched in the Czech Republic.

It is a very successful launch.

We have done consumer tests in some shops.

We have seen consumer off take above 1% of market share.

That's a very good result for that one.

So we are on track there, also on -- on our plans to expand further into other markets in the Chinese joint venture.

Okay.

Great.

Thanks a lot, Hermann.

Thank you.

Your next question is coming from Erik Bloomquist with JP Morgan.

Please go ahead.

Hi.

Good morning, Hermann.

Good morning, Erik.

Just one question to follow up.

I just want to -- was hoping you could discuss more of the outlook in Germany.

It appears to be still a market where there is pressure on the premium segment with the low price segment continuing to gain share and OTP as well remaining strong.

What are the prospects for that market to stabilize?

Given that the taxes in east -- European east EU countries have risen.

Are we going to see Germany stabilizes and then perhaps see a recovery in premium as there is more innovation in that market?

Any comments around that would be very helpful.

Thank you.

Okay.

Well, let me start by saying that Germany will always be a challenging market.

And actually for the cigarette or the tobacco category, for all consumer goods.

That will always be the case.

That being said, let me also say that our operating company's income in Germany is actually stable.

Net/net of currency is stable.

Then I would say that there are a couple of good indices in there.

I wouldn't say everything is beautiful already.

It's not at all.

There is still work to be done, but there are good indices.

First one, I would say, the Marlboro decline clearly has slowed down.

It's on the way to stabilization, I would think.

L&M in the market is the fastest growing brand.

It's actually now sourcing from other low-priced brands and not just benefiting from down trading.

Marlboro sales are stable.

There's some signs of decline.

And if you adjust for the inventory distortions that you have seen in the market, then our first quarter share is up 0.9.

So yes, what we do in Germany is focused on innovation.

It makes for flavor, the new Marlboro version there has been relaunched.

Brand 29 additive-free version is coming in May on the OTP part, we are out with the tobacco block, which is really innovation in that segment.

It's the perfect make your own device, if you like.

We are selling about 20,000 machines per month, which means you attract 20,000 smokers per month.

I think these are pretty positive things and indices we see there.

I really have to come back to my first point, Germany as a whole will always be a challenging market.

That's clear.

Okay.

Thank you.

You're welcome.

Thank you.

Your next question is coming from Adam Spielman with CitiGroup.

Please go ahead.

Good morning.

It's Adam Spielman here.

Hello, Adam.

The first question very quickly if I may, you said that your volume this quarter was down 0.8%, but if you adjust for the duty-free it was really 0.5% decline.

If we adjust again for the Czech inventory SKUs, what would the underlying figure be?

Okay, the Czech situation is, of course, completely distorted there.

I mean, the volumes in the Czech market are very low this year, this quarter, as we said before.

On the other hand, our market share in the Czech market then correspondingly is very high.

So it's totally distorted.

Actually, I didn't want to take that out because it's so much of a distortion.

It would be clearly better again, but I think that would -- would not be fair to do that.

Okay.

Much more important point.

This quarter obviously volume has been weak but your net revenue has been in line with your long-term guidance and your OCI much better.

Particularly as your innovation pipeline comes through, is it possible to suppose that the -- we will continue to see the same patterns, the volume relatively subdued but actually the net revenue line doing significantly better, if you like, the price mix very strong given the fact that your innovation is mainly on premium brands which will inevitably help volume but, even more, help the net revenue line?

Okay, you are right that the net revenue line is an extremely important line and actually we are happy and we are satisfied that we are within the net revenue guidance nevertheless, although we are not yet, I would say, on our volume target of organic growth of a percent there.

So it shows that we are able to deliver on the revenue line even without yet meeting the target on the volume line and in terms of the operating company's income we are also perfectly in line with our longer term targets as we have given them up.

That, however, will not make us complacent to work not as intense as we do right now on the volume line.

Of course, we focus on innovation on the premium side of it, but also on the midpriced side of it as I think the best example of that one is L&M in eastern Europe.

So we keep on working on all of them, but we are very pleased to see that we are doing well on the revenue line and the OCI line.

Just very quickly, my understanding when you gave the talk in the road show was they were longer term targets and you said very clearly at the time you were unlikely to hit the volume targets in this year.

When do you think it's -- when does longer term kick in, I guess is the question.

When do we think these targets should be applicable?

Look, as you rightly say, that volume target, as we have said for this year is that we will still see a slight decline.

We are in the quarter at 0.5%.

I think that's a slight decline.

So that's the 2008 guidance on the volume side.

We will see sequential improvement.

That's our target, bringing it to stable volumes and go forward from there to put a precise timing in terms of months on it, I think, is not possible.

We want do it as quickly as we can, believe me.

Finally, to ask the question about the skew of a promotional spend.

You say clearly one of the reasons OCI was strong this quarter is promotion of skewed away from this quarter to the rest of the year.

Can you quantify what the OCI might have looked like had permission been evenly spread throughout the year, so instead of being 17% would it have been 12% or something like that?

No.

I mean, look, there are really -- we come back to the guidance, there are -- we will have to refer you what we said.

What went into the -- into the new guidance, the four elements which are the currency, the business momentum, the reinvestment and the expenses.

So those four form at the end of the day the basis for the new number.

And you can't give us sort of a more underlying --

I wouldn't want to go any further than that.

Okay.

Thank you very much.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is coming from Jonathan Leinster with UBS.

Sir, please go ahead.

Good morning.

Yes, a couple of things.

First of all, just to clarify, on the promotional expenditure, is it fair to say that as of now under the new guidance the total promotional expenditure in dollar terms expected in 2008 is higher than it was when you gave the original guidance at the end of January?

The point is that you have a skew of promotional expenditures through the remainder of the year.

That's one point.

And the other point is, yes, we do reinvest in some of our key markets.

So the total should have been higher than the original, whether it's skewed or not?

Well, as I say, it's two elements.

Timing on one side and reinvestment on the other side.

Secondly, with regards to the rapid rise of Chesterfield, Parliament and Virginia Slims.

How much of that is a geographic rollout or is it pure end market for those brands?

Look, for example, take -- take Chesterfield.

I mean Chesterfield is growing really enormously and doing extremely well in Ukraine and Russia.

Just to give you a feeling for it, if you take the growth of Chesterfield in those two markets, then actually that growth almost markets the decline of L&M in those two markets.

So this is not an expansion.

This is strength of the brand in the market.

Chesterfield, however, is not only strong in those two, it is also showing good signs in Spain, and in Italy where it's growing as well.

So it is growth in existing markets.

There, of course, can be more markets that can be expanded to later on, but right now, this is existing markets.

And Parliament, you have key markets like Turkey or Russia where Parliament is doing extremely well.

Again, it gives us the potential to expand further, but it's not just kind of pipeline effects that you see there.

This is real growth.

Okay.

Thanks.

Just lastly, with regards to the new product innovations, they seem very much skewed towards the emerging markets, Indonesia.

Japan is hardly an emerging market, but there is quite a lot going on in Japan.

How many have actually been introduced into the EU which seems to be the real core problem area for Marlboro over the longer term.

No, look, I mean, there will be -- there is actually already innovation in EU.

Marlboro MX for flavor has been relaunched in Germany in the quarter.

Blend 29 is coming as an additive-free version in May.

We had the tobacco block also in Germany.

So we are having really quite a number of innovations also in those markets.

So we don't forget about those.

It's coming everywhere.

Okay.

Thanks very much.

You're welcome.

Thank you.

Your next question is coming from [Dennis Jean Jacques] with [Bassel] Capital.

Please go ahead.

Hi, Hermann.

[Dennis] here.

Just very quickly, just a point of clarification.

Are you expecting China to contribute this year to your EPS guidance?

And where does the China strategy fit in overall, as we look at markets, the emerging markets?

Is it a top priority?

And the other question I had is in terms of the buyback program.

Is there a set kind of buyback, in terms of buying back shares on more of an opportunistic basis or more kind of automatic buyback?

If you could just comment about that, that would be great.

Thanks.

On China, I mean, meaningful EPS impact for this year, no.

That will be small.

Look, I mean, the key point really is for China to be the profit preferred partner of this China national tobacco company there.

That is really the key in there.

It's billing long-term relationships in China.

That has really two elements to it, which is the China domestic element, that is Marlboro licensed production for the summer.

And that is on the other side is doing business internationally with them that is illustrated by the launch of RGD in the Czech Republic.

These are the two elements in there which describe best the overall strategy for China.

On the buyback, there is, look, early May we will start the buyback.

This is a two-year program and we will not be there speculative.

We will, of course, follow all of those that apply to share buybacks.

That's, I guess, what I have to say on that one.

Great.

Thank you.

You're welcome.

Thank you.

Our final question is coming from Thomas Russo with Russo, Gardner and Gardner.

Please go ahead.

Hi.

Congratulations, Hermann, and congratulations in particular with the described halo effect that you referred to around the world as you roll out innovations to meet the consumer's demand for Marlboro.

That's a most positive development.

Thank you very much, Tom.

You bet.

A couple of questions.

First, talk about the Interval acquisition and what the market is like for France for [loose].

I think that's where you suggested it was intended to serve your needs.

What is the market like for fine cut in France?

Interval, actually, I mean, on the Interval acquisition I would say we have said before that we are a tobacco company.

We mean that serious.

Actually, the Interval has a 14.8% share of the fine cut market in France.

An estimate of operating company's income of that would be some 25 million Euros.

That's about the size of the business there.

Yes.

Important, this is the leading brand amongst young adults to age 29.

So it compliments, I would say, our portfolio very nicely.

We have been in that market in the entire EU region quite a bit, but we have been in there mostly with our cigarette trademarks and we really have now a real grow your our own trademark that we have acquired there, and that's another positive of that acquisition.

And other markets where they are in market, 14.8% share in France, where else do they do business?

Interval is very much concentrated in France it exists also in Spain, Luxembourg, Belgium, the surrounding countries, but it is skewed towards France.

That doesn't mean it is just the French brand.

You had mentioned at some point during the road show there were questions about leaf, both the availability of leaf and maybe the unusual cost of leaf.

I'm wondering whether it had any impact.

No, I mean the story line is exactly the same as we described it in the road show.

I mean simply by the fact that leaf durations go well beyond a year.

Therefore, it means that when you buy somewhat more expensive leaf at the beginning, it only will hit your income statement over time.

So you have very little effect of that in the first quarter.

Thank you.

Thank you for the call.

You're welcome.

Thank you.

Thank you very much for joining us this morning.

We ran a little over, but we wanted to make sure that we took all the questions and we appreciate you joining us.

That concludes our conference call.

Our 2008 second quarter conference call is scheduled for Wednesday, July 23.

So we'll continue to post updated information on PMI website so please refer to the website for additional information.

Thank you very much and have a great day.

Thank you.

This concludes the Philip Morris International 2008 earnings conference call.

You may now disconnect.