菲利普莫里斯國際 (PM) 2008 Q2 法說會逐字稿

Good morning and welcome to Philip Morris International's second 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) Media representatives on the call will also be able to ask questions following the conclusion of questions from the investment community.

I'd now like to turn the call over to Mr.

[Nick Rolly], Vice President, investor relations and financial communication for Philip Morris International.

Please go ahead, sir.

Hello and good morning and thank you for joining us.

Early this morning we issued a news release, which contains detailed information on Philip Morris International's 2008 second quarter results.

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

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

In our first quarter earnings release we provided a reconciliation of 2007 reported results to 2007 pro forma adjusted results by quarter and for the full year and for your reference this document is also available on the web site.

As we take you through our second quarter earnings results today please note that we will refer to certain results as being after adjustments.

This will imply that this data has been adjusted for the impact of currency and acquisitions.

Furthermore, to provide you with a pure organic comparison we will also exclude the impact of the transfer of our US duty-free business to Philip Morris USA in August last year.

This latter adjustment is not included in the numbers in our press release issued today.

Please also note that unless otherwise stated we will be talking about results in the second quarter 2008 and comparing them with results in the same period in 2007.

References to international tobacco market shares are Philip Morris International estimates based on a number of sources.

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

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

Hermann?

Thank you, Nick.

Hello, everyone.

As you have seen from our press release we have reported excellent second quarter results.

These results, combined with our continued strong business momentum, currency favorability, higher pricing in a number of markets, such as Italy and Russia, and planned reinvestments in key markets have enabled us to raise our annual guidance.

Our revised adjusted full year diluted EPS guidance for 2008 is between $3.32 and $3.38, representing a growth rate of between 19% and 21%.

Diluted earnings per share were $0.86, up 22.9% or $0.16 per share.

Of this increase $0.06, or about 40% of the increase reflects the strength of our business and favorable currency accounts for the other $0.10.

In the first half of the year reported EPS was up 26%, or $0.36 per share, with business growth and currency each accounting for about half.

Net revenues, excluding excise taxes, were 15% higher at $6.7 billion, representing an increase of 874 million.

After adjustments net revenues increased by 4.4% driven by higher prices, as well as improved volume and mix in several key markets.

Reported operating companies income, or OCI, increased by 23.7% to $2.8 billion.

After adjustments OCI was 9.8% higher.

We achieved double-digit OCI growth in EMEA, Asia and Latin America.

Our cigarette volume reached 223.2 billion units, an increase of 1%.

Organic volume increased by 0.6%.

Strong growth was achieved notably in Argentina, Egypt, Indonesia, Korea, Mexico, Russia and Ukraine.

This is an improved performance that reinforces our confidence that we can achieve our longer-term goal of 1% to 2% volume growth.

Marlboro shipment volume declined by 2.4% to 79.1 billion units.

After taking into account the impact of the transfer last year of our US duty-free business Marlboro shipments were up in all geographical regions except the EU.

The brand continues to perform strongly in Argentina, Egypt, Indonesia, Korea, Mexico, Romania, Russia and Ukraine.

Our [innovative] line extensions are helping to strengthen the vitality of the brand and its overall equity.

Increased shipments of Parliament and Virginia Slims have reinforced PMI's leadership position in the premium sectors.

Parliament shipments were up 28.1% thanks to tremendous momentum in Korea, Russia, Turkey and Ukraine.

Virginia Slims shipments increased by 12.2%, reflecting both volume growth in existing key markets, such as Japan and Korea, as well as the penetration of new markets such as Greece and Romania.

Our two key brands in the mid-price segment are L&M and Chesterfield.

Outside of the EMEA region the volume of L&M grew by 3.4%, driven by France, Germany, Netherlands and Poland.

L&M is the second largest brand in the cigarette industry in the EU region behind Marlboro, and over the last 12 months has been the fastest growing brand in Germany.

As you know, we have revamped the brand in Russia and Ukraine.

While L&M shipments continue to decline in these markets we were able to more than offset this volume decline through higher shipments of Chesterfield.

Chesterfield sells at the premium to L&M and consequently generates higher margins.

Globally, we are delighted by the performance of Chesterfield, as it maintained its very strong momentum with an increase in shipments of 18%.

Our key brands are in good shape and we are continuing to strengthen our international brand portfolio leadership through the development of a successful innovation pipeline.

We have talked to you previously about the success of Marlboro filter plus in a number of markets.

Let me share with you some other examples.

Marlboro Intense is a rich, flavorful, usually shorter cigarette in the red pack.

It was launched initially in Turkey and more recently in Belgium and the Netherlands.

In Italy a lighter-tasting version was launched in March as Marlboro Compact in a silver pack.

To support our leading position in the growing menthol segment we have launched Marlboro Crisp Mint, Marlboro Fresh Mint and Marlboro Ice Mint in a number of markets in Asia and Latin America.

These refreshing products are performing well.

For example, Crisp Mint reached a 1.4% share in Hong Kong, Fresh Mint 0.4% in Malaysia, and Ice Mint 0.3% in Japan.

,I will discuss our latest mint innovation Marlboro Black Menthol, when I talk specifically about Japan later.

We have successfully developed a number of new products in response to an increasing demand in several markets for cigarettes with a slimmer diameter.

Premium priced Virginia Slims Uno has notably achieved a 0.3% market share in Greece and Romania in May and a 0.2% in Japan in the quarter.

Mid-price L&M Link has achieved a 1.5% market share in Poland.

Let me now take you through the results and key business developments in our four regions.

Industry volume in the EU region is estimated to have declined by 3.7% during the second quarter, driven by the one-time impact of recent public smoking restrictions, higher prices and the long-term decline in smoking incidents.

Our shipment volume decreased by 4.4% to 64.8 billion units and our estimated market share was down slightly to 39.4%.

Revenues, net of excise taxes after excluding the very positive currency impact, declined by 1.7% and OCI was essentially stable.

These results were impacted by the total market declines and the need to temporarily absorb some tax increases in the Czech Republic and Poland, where we had shorter inventory durations of [otecs] products than our competitors.

During the first half of the year revenues, net of excise taxes in the region, were essentially stable and OCI increased by 5%, net of currency.

Business fundamentals in our four key EU markets continue to strengthen.

In Germany our adjusted cigarette market share was up 0.3 points to 37%.

L&M is growing and Marlboro is sequentially improving its share.

We also expanded our position in the important German fine cut category, with a market share increase of 4.8 points to a record quarterly level of 16.5% thanks to our [innovative] tobacco block and the strength of our L&M and [mix] brands.

Our profitability in Germany is up both in the quarter and the first half of the year.

In Italy and Spain we continued to improve our profitability during the quarter.

Our share is up in the first half in both markets.

Chesterfield is performing very well and Marlboro is resilient.

In France, while share is down on a year-on-year basis by 2.5 points due to the impact of less-favorable price point for Marlboro our market share of 40.9% has been stable since the fourth quarter of last year.

The outlook for the EU region is improving.

We have recently announced price increases in Italy, the Netherlands and Switzerland, and have strengthened our competitive position in the important German market.

Public smoking bans have now been implemented across most of the EU and we expect a one-time impact on total industry volume to have been largely absorbed by year end.

The very large tax-driven price increases in central Europe related to EU [accession] are moderating.

The Czech Republic has now reached the excise tax level currently required in the EU.

Hungary, Poland and Slovakia should reach it next year.

In this context I would like to comment on the update on the tobacco excise directive that the EU Commission is proposing.

First, I would like to emphasize that we welcome the review, as it is an opportunity to improve the framework for excise taxes in the EU.

Second, the propose is essentially in line with what we had expected following a broad consultation.

The next step is for the EU Commission to discuss the proposal in detail with the member states a process that will allow individual countries to convey their views on each element of the proposal.

As a unanimous agreement is needed on every proposed change to the current directive, amongst the 27 EU member states we expect that the proposal will be modified prior to its finalization, which is foreseen during the second half of next year.

We are pleased that EU Commission recognizes that there is little justification for significant differences in the taxation level for cigarettes and fine cut products.

We also welcome the proposed increase flexibility to be given to governments in terms of the excise tax structure and the level of the minimum excise tax.

We have a regret that the Commission has not taken this opportunity to propose an abolition of the excise incidence rule and are concerned that tax increases resulting from the proposal could have unintended consequences in certain EU countries if implemented as currently proposed.

During the second quarter the EMEA region continued to achieve very strong results, with volume up 3.2%; net revenues, excluding excise taxes and currency, 10.2% higher; and OCI, excluding currency, increasing by 22.9%.

We are benefiting from from the premium SKU of our portfolio as consumers continue to trade up.

The resulting volume growth and improved product mix has been further boosted by price increases, thus driving profitability to record levels.

Russia is central to these excellent results, with PMI shipments increasing by 8.3%.

Continued strong consumer uptrading has benefited Chesterfield, Marlboro and Parliament.

Revenues, net of excise taxes and currency, rose by 24%, driven by favorable volume and mix and higher prices.

This has enabled us to increase profitability to record levels.

Our shipments grew by 2.9% in Turkey.

While our share was essentially stable we benefited from consumer upgrading, with very strong Parliament growth.

This more favorable mix, along with higher prices has been driving profitability.

In Ukraine shipments increased by 8.2%, driven by Chesterfield, Marlboro, Parliament and Virginia Slims.

As a result, our market share reached a record level of 35.2%.

Our profitability will be further boosted by the recent retail price increases in this important market.

Cigarette shipment volume in Asia grew by 1.9% to 56.8 billion units, with growth in Indonesia and Korea more than offsetting a decline in Japan.

Marlboro is performing very well across the Asia region, with a volume increase of 1.8%.

Marlboro Filter Plus and Marlboro Mix (inaudible) have reinforced the brand's equity, helping to drive the brand family to record levels in Korea and Indonesia, and Marlboro continues to perform strongly in the Philippines.

Marlboro's success is complimented by tremendous performance of Parliament, driven by Korea, whose shipments were up over 50% in the region and Virginia Slims, which experienced double-digit growth.

Revenues, net of excise taxes, were up 4.9%, excluding currency.

We achieved a 15.2% increase in OCI, net of currency, and Asia's excellent results notably in Australia, Indonesia and Korea, more than offset the decline in Japan.

We are very pleased with our results in Indonesia.

Our shipments there were up 14.9%, as our entire portfolio grew with A Mild and Marlboro performing particularly well.

Let me focus for a moment on Japan.

During the second quarter industry volume was down by 1.6%, helped by freight purchases in advance of the implementation of the new (inaudible) [H-control] mechanism.

PMI shipments meanwhile declined by 7% due to the declining total market and an optimization of stock coverage levels.

Our share reached 23.9%, which was 0.3 points below the prior year's level but stable compared to both the first quarter of this year and the last quarter of 2007.

Marlboro' share remains stable at 9.8%.

We are launching Marlboro Black Menthol during the first week of August to reinforce the brand's performance.

This innovative new product has an unique refreshing mint flavor and provides a bold, cooling sensation.

Lark's share of 6.8% was marginally down from last year, but slightly up compared to the first quarter of 2008.

Recently launched Lark Mint Fresh has achieved a market share of 0.3% and the new Lark Classic is doing well in test markets.

Virginia Slims has continued to expand to reach a market share of 2.1%, driven by the successful launch last year of Virginia Slims (inaudible).

These results show that our increased focus on innovation is starting to have a positive impact and we expect improved results going forward fueled by additional marketing investments.

While we are focused on restoring share growth momentum we are also very conscious of the pressures on profitability from a declining market, which is subject to price controls.

While we oppose the recent call for a massive tax and price increase we believe that this debate may encourage the government to consider revising the tobacco law to allow pricing freedom.

Latin America had another very strong quarter on all counts.

Our cigarette shipment volume was up 7.9% and 1.3%, excluding acquisition, driven by strong results in Argentina and Mexico, partly offset by Columbia.

In Argentina our shipments increased by 8.8% and we gained 1.9 points to reach a market share of 70.3%, driven by Marlboro and the Philip Morris brand.

In Mexico, the total market remains stable, while we were able to increase our market share by three points to 67.2%, driven by Benson & Hodges, (inaudible) and Marlboro.

In Latin America as a whole our revenues, net of excise taxes, increased by 8%, excluding currency and acquisitions, while our OCI was 15% higher on the same basis.

Let me say a few words about our actions to enhance shareholder value.

On May 1st we started our two-year share repurchase program.

Since then we have spent $2.1 billion out of the $13 billion approved by the board of directors.

In total, we have so far purchased 41.4 million shares at an average price of $51.48.

On June 18th we announced our first quarterly dividend as a public company of $0.46 a share.

As stated previously, we expect to return a total of $21 billion to shareholders over the next two years, which reflects about 20% of our current market capitalization.

In order to help finance these and other business requirements we successfully raised $6 billion in May in US dollar bond offering at what we believe are attractive rates.

During the second half of the year we intend to continue to access the capital markets, provided financing conditions are suitable.

To sum up, our business in EMEA, Asia and Latin America are performing very well, with strong volume growth and improved mix and higher prices and margins.

The outlook for the EU region is improving, with pricing power remaining strong and an enhanced competitive position notably in Germany.

Japan remains challenged due to continued price controls in a declining market.

We have, however, stabilized our market position and have strategies in place, which we believe will enable us to grow share again.

Enhanced innovation is driving better organic volume and we are on track with our productivity-saving programs and our financial measures to return significant cash to our shareholders.

As you can see, we are delivering against targets that we established and shared with you in March.

I will now be happy to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is from David Adelman with Morgan Stanley, please go ahead.

Hi, Hermann and Nick.

Hi, David.

Morning, David.

Hermann, I wanted to ask you a few things.

First, with respect to share repurchases what's the argument against maintaining for the foreseeable future the execution pace in the first quar -- in the second quarter?

You're basically buying back $1 billion a month, why not keep that going?

Okay.

On the share buyback, we have always been and will stay on a steady pace there.

We actually did opportunity purchases given the attractiveness of the share prices and will continue to do that when appropriate.

And Hermann, why weren't diluted shares outstanding -- they were flat sequentially, why weren't they down Q2 versus Q1?

Well, we started the share repurchase on May 1.

Remember, there were -- there is the 30-day delay after being quoted, so it starts only on May 1, and then it is going in at weighted averages so it washes in over I'm time.

Okay.

Then could you clarify your comment in your prepared remarks with respect to the EU tax proposal about regretting the absence of an abolition of excise tax -- the excise tax incidence rule, what specifically are you referring to there?

Okay.

The EU article four excise review, the way I would put it is I see three good elements in there, one watch out, and I would say one overriding remark, which is probably what I should start with.

The overriding remark is that any change to the existing laws -- the existing directive needs unanimous agreement of all 27 member states, so therefore that's going to take a while.

Expect something final, say, the second half of 2009.

Then the watch out, which is precisely your question, is the proposed incidence increases that you see in the proposal that could trigger price increases -- excise tax-driven price increases in some markets, which could actually lead to the known undesired side effects from counterfits to border sales to all these things that we have seen before.

So that's really what I would call a watch out, but very importantly let me also say there's good things in there, because it's really three good things.

More flexibility on the minimum excise tax, which right now is capped at the 100% of the most popular price class, that's a good one and important one.

Proposing to raise the specific element which today can go up 55% to 75% is another very good element in there.

And the partial alignment of roll-your-own, make-your-own at two-third of cigarettes taxation is also good element.

Okay, and then two other things Hermann.

Are you willing or prepared in Germany to have Marlboro at a per pack price point above five Euros alone as you've -- sort of repeating the situation you're suffering through in France?

Yes.

Of course future pricing you know that I will not comment on that.

We will decide once the moment is there.

I think that's what I have to say on pricing in Germany.

Okay.

Then lastly Hermann it's early days but is there any evidence in the marketplace of any change in the behavior of [Altada]/Imperial subsequent to the consummation of that merger?

No, not really.

This is competition.

As there has been competition before we will have to see.

Certainly there will be a lot of integration going on in these companies.

But look, we focus on our own place here and really everybody around the target increased revenues and increased profitability in our own place, that's what we concentrate on.

Okay, thanks a lot.

Thank you David.

Your next question is from Adam Spielman with Citigroup.

Please go ahead.

Hello, Hermann.

Hello, Nick.

Two questions, if I can please.

First of all, have you seen either in the second quarter or in your trading since then any signs at all that a weakening economy, either in the European Union or elsewhere, is causing either weakness in volumes or weakness down trading?

I know for example that you've seen some down trading away from Marlboro in France, but we saw that in the first quarter.

What I'm interested is whether there has been any incremental worsening really anywhere in the world?

That's my first question.

Okay.

I would say, starting with the EU region the down trading we have seen in the last couple years that was mostly triggered by price repositionings of previous mid-price and even premium brand by competition to the low end.

Well, there's nothing left, I'm afraid, to be priced down there by competition, so that is over.

We are rather in a more normal competitive situation going forward.

[If it then] expanded rather on a worldwide basis in the light of increasing inflation (inaudible), the rising food prices and all of that, then actually I must say we can't see that.

Indonesia would eventually be a market where you could expect to see something like that.

We don't.

Actually our volume in Indonesia is up 14.9%.

The market overall is up in Indonesia and thats in environment with high inflation and with reduced fuel subsidies for the people earlier this year, so we can't see it there.

If I go over to Latin America, there actually we have to see that Latin America is rather a part of the world which is a source of commodities and where actually salary increases are still in most places above inflation, so we don't see that either.

So cigarettes are probably a fairly resistant product to these type of things.

The only place where I could see a little bit of that would eventually be Columbia, where you see it at the lower end of the price spectrum where you see some impact there, i.e., more stick purses and less purchases overall, but that is the lower bracket income class of population because in that very same market, by the way, Marlboro is growing.

Actually you've already touched on what was going to be my second question, which is to really focus on Indonesia.

Obviously in May the price of gasoline went up by 30%, I believe.

Your volume, as you say, in the second quarter was exceptional, but if we can just look forward do you think -- firstly what do you think volume is going to look like, because presumably it's going to have to slow down from 15%.

And also just to reiterate, you've seen no signs that the increase in fuel is having any impact on your business in Juni -- in Indonesia.

No, I cannot exclude that for the future that this is going to have one impact at a certain point in time, but right now I just do not see that.

I agree with you that 14.9% volume growth is,, of course an exceptional number and will not be a number that keeps on going there for the next ten years.

But no, we don't see any of that.

What is, of course, important and the context probably is, as well, that while you have roughly, I would estimate, an inflation of 10% in Indonesia, prices -- cigarette prices were up about 6.5%, so a little bit below inflation.

So if you go through our portfolio Marlboro is up 27%, A Mild is up 20%, and DJI Sam Soe is up 4%, so this is really going very, very nicely and we also express our confidence going forward in that market by putting a greenfield there, which actually the official opening is going to be August 20.

Thank you very much.

And ask you one final question.

In your earlier remarks you referred to price increases in Italy, in Holland -- or the Netherlands and Switzerland, are those very recent increases or were those ones back in Q1?

No, no, no, these are recent increases.

The Italy price increase, for example, if I remember correctly was the last week of June.

Thank you, I wasn't aware.

Thank you very much indeed.

You're welcome.

Thank you.

Your next question is from Christine Farkas with Merrill Lynch.

Please go ahead.

Thank you very much.

Good morning, Hermann and Nick.

A couple questions for you.

-- Christine.

Hello.

On the cost savings you did talk about cost savings being on track.

Will you quantify those?

Do you plan to give us an update, for example, in dollars or perhaps where you may have allocated these cost savings so far year to date?

Okay.

On the productivity and cost savings we are on track.

We will meet our productivity and cost savings target over the next three years of $1.5 billion, so if I may go through a little bit the main elements and what are we doing there.

In manufacturing, where we said $850 million in manufacturing productivity, the first big element there is the resourcing of volume from USA factories to PMI factories.

We will be one or two months ahead of schedule with bringing that over.

Remember, that was almost $180 million by 2009, perfectly on track.

The clustering, which was all regrouping the technical functions and the procurement functions in about 10 places around the world, is progressing.

Rationalizing nonstrategic SKU's, product specifications, simplifications is an ongoing job, we go ahead.

On the $450 billion G&A procurement the headcount reductions in the regional and PMI HQ's are essentially done.

The finance shared service centers are up and running.

The human resource shared service centers are being implemented as we speak and are being rolled out, and we have -- essentially by the end of the year you can say we will have implemented one SAP program around the world as an ERP backbone system for the Company.

And in the EU the new cost cutting program that is also part of the secret of our profitability increase in that, in addition to, of course, the pricing variance in there, we keep on going there.

We have an early retirement program, for example, in Germany in our one-time charge this quarter, so we keep on going.

So we stay on track with all of that and we will give a detailed review once a year.

Okay, that's great.

And just a regional -- a couple of regional questions as housekeeping.

You certainly did talk about Indonesia, can't, can you tell us what your share was in the quarter?

Indonesia is actually a very difficult place in terms of Nielsen shares.

The shares in Indonesia show us essentially stable shares.

Given the volume increase that I know for sure, because these are simply sales and revenues, I would rather think that those shares for the moment are somewhat understated in Indonesia.

Okay, I was just curious.

Given you've provided that share in the past, but not this quarter is looks like it's at least stable if not higher?

The share numbers, as I have in front of them, they are stable, they're not high up, but I take that there is always a certain delay in certain flows.

It's a big country, it's difficult to measure, I guess.

Okay.

And then last question then on Poland.

Just as a broad statement I was pleased to see underlying organic volume growth, so that's favorable.

And looking at a country like Poland and keeping your comments about trading up across many of your regions, we should be lapping the price increases soon, I believe, or remind us when that is, but there's also some down trading.

Can you just put the two in context as to how the outlook is with that market?

Yes, with pleasure.

Poland is an very important market.

We talk about 65 billion cigarettes market and another probably seven to eight in roll-your-own cigarettes tobacco.

Look, in 2007 this market really turned into a much more profitable market.

The problem in Poland for the time being is still the missing forestalling regulations, i.e., these huge duration of old priced, old taxed products that are in the market.

You had some competitive, some brands in there with durations of up to one year, so when the consumer sees the new price actually the next price increase has already taken place.

So that's a bit unfortunate and its because we're a big company in that market it forced us to do some absorption in the second quarter of excise taxes, which is something we really don't like to do unless we are forced to do, which we were here in Poland and actually also in the Czech Republic.

Well, in Poland this is the last round that is coming, the last excise increase in the context of EU accession for January 1, 2009, so we will have one more round of this gain so it's going to normalize in the third, fourth quarter of this year, but it's going to restart as of January, 2009.

However, the good thing is, as well, there are a couple of excise structure improvement eventually considered in Poland, although forestalling regulations will not come for January '09, or are unlikely to come.

So going forward, we are soon out of that effect of the EU accession and that then will be the moment where actually there is room for uptrading in that market.

Today there is not much uptrading in that sense, if you like, because prices are going up already that steeply.

Once they stabilize we will benefit actually from our premium portfolio and what you see now in terms of down trading -- what you talked about -- is really rather the very low end of the market and it is traditional 70 millimeter products.

At the end of the day we made a conscious choice there between volume share and profitability for the sake of profitability.

Okay, that's all for me.

Thanks so much Hermann.

You're welcome.

Thank you.

Your next question is from Erik Bloomquist with JPMorgan.

Please go ahead.

Hi, good morning, Hermann.

Morning, Erik..

Question on the outlook for the second half.

Implicit in the increased guidance is a slow down in the second half in terms of the earnings per share and I was wondering if you could talk about the places where we should be thinking that there's going to be an sequential slow down in the second half versus what we have seen in the first half?

Okay.

It comes down to overall guidance development there.

What we took into account is the business momentum overall which is very positive to start with, the currency projections, of course, and importantly, as I said already, in the first quarter the spending pattern, which is skewed anyway toward the second half and the additional investments that we are making into the markets, they will actually also hit the market and be visible to the consumer and therefore will hit the income statement also principally in the second half, so that's our additional investments.

And of course financing costs go up with the build-up of the leverage on our balance sheet.

In terms of investment, where we go, that's -- I said, of course, Japan is one of the places to go, but I wouldn't want to go into individual markets because that would be too sensitive from a competitive point of view.

Sure, understood.

But -- so is it fair to characterize what you're saying then is that the slow down in second half EPS is more driven by PMI investment than it is by any anticipated slow down in your markets?

That's right.

I would say if you look at the growth that you have seen in the first half of the year in the actuals, as we said it's kind of 50/50 between currency and business.

Actually for the second half I see a higher proportion of business than currency of the growth.

Okay, great, that's very helpful.

Second question was with respect to Japan and I was wondering if you could talk a little bit about, more about the potential for a Japanese large tax increase?

And then also expand on your comments that PMI hopes that the discussion on tax could lead to a reform of the Japanese tax structure.

Okay.

The proposal that is on the table that's been discussed now, let's first really properly situate what that is.

It is a group of 45 members of Parliament that have gotten together and are developing that proposal.

There are hearings, they're bringing that proposal together, but it remains a proposal that then goes to the budget and the finance ministry, which is the decision body.

So therefore in terms of timing that goes to that decision body somewhere towards the end of the year and you will not see any impact of whatever the outcome is before sometime like spring next year.

Then I would say that all around the world governments have seen that abrupt increases don't work, so I think that the real chance in there is that this can lead to a discussion of the imbalance in the system that you have today.

You have price control on one hand, you have the wish to reduce consumption from the health side on the other hand, you have a government stake in one of the top four cigarette companies around the world, and then at the end of the day you have price control in the Japanese home market.

So overtime I would think and I would hope that this could lead to a more -- a better discussion about how to bring that forward in terms of eventually moderate regular excise increases accompanied by pricing freedom in the market.

So let's hope that this is a trigger point that can lead to a decent discussion on those points.

Okay, thank you.

My last question is just related to the current EU tax proposal.

As you noted in your remarks one of the things they're doing is increasing the potential level of minimum excise tax.

As I recall from the Spanish experience in 2006 that tended to benefit premium brands.

Is that a fair way to characterize one of the outcomes of this tax proposal is we should see a benefit through the EU as it's implemented over time toward more premium product?

I would think so.

As a government you don't want to raise your taxes and therefore prices on one hand and then see the people simply trade down and actually deliver less taxes and smoke as much as before, then as a government you have neither achieved the finance ministry targets nor the health ministry targets.

Spain is a good example there, that ,of course, minimum taxes at an effective level put limits to down trading and therefore achieved on one hand the government's targets and should help, actually.

then the more decently priced products on the market.

Great, thank you.

You're welcome.

Thank you.

Your next question is from Judy Hong with Goldman Sachs.

Hi Hermann, how are you.

Hi Judy, very well, and you?

Good.

An a few questions.

First just clarification in terms of your guidance and you talked about some of the drivers, but can you quantify how much is currency driven versus operating performance that's coming in better than expected?

Okay.

Look, what we took into account are, of course, also, as I said before, the currency projections.

I think I will go that far that really for the increase that you will see in the second half, that really the business portion of that is really the more important part than the currency part, but I wouldn't want to split it up in detailed numbers.

Okay.

And then if we look at your EU performance in the second quarter, your operating profit was flat if you take out currency versus the first quarter, where operating profit was actually up 9% and volume decline really didn't change much from quarter to quarter.

I'm wondering why the operating profit actually slowed down in the second quarter versus the first quarter?

And secondly, in relation to that you sound actually more optimistic about EU outlook going forward despite the second quarter performance, so if you could just talk a little bit more about what gives you comfort that the trend will improve and as you look out for the balance of the year are we expecting EU profit to actually see positive trend in the back half of the year?

Okay.

Yes, there are two rather, I would call them almost short-term effects that you see in the EU, and actually, if you look through the markets about 50% of the EU markets are actually affected by one of the two effects that I will describe.

The first one is that actually smoking bans are now implemented essentially everywhere in the European Union, and then, of course as we all know, has more or less strong one-off impact and then it goes back to normal trends.

So that is, of course, hurting overall total markets and therefore the volumes of the market participants.

So Germany, UK, France, Portugal together, then the market decline in those in the second quarter is 6.1% and the revenue decline in those markets in the second quarter is 3.8%, so that's very much driven by that, but as we all know, this is a one-time, one-off impact.

And then the second short-term effect is really the EU tax formalization in the accession countries, which as I said before is essentially down by year end.

Poland's to come January 1, 2009, so going into 2009, otherwise it's just Hungary, Slovakia.

In 2010 you will have Romania, Hungaria, Balticks, but all the rest are done.

The big ones are done.

On the positive side going forward is that the pricing power is intact, so we have realized substantial pricing in the EU, so in the quarter $77 million, and that despite the fact that we absorbed for Czech and Poland together $45 million again for this forestalling effect that we had in those two markets, so that's a one-off.

The hit was in Q2, that's not something that comes every quarter.

As I said before we hate doing these things unless we have no choice for competitive reasons, so we did it.

And the price increases that you've taken in Italy and Netherlands and Switzerland can you quantify the magnitude of the price increases?

The price increase in Italy we did is essentially EUR0.10 Euro cents across the board, Switzerland is essentially 20 Swiss [sontems] across the board, and Netherlands is, if I remember correct -- yes, is $0.40 -- EUR0.40.

Again, for example, Marlboro going to 440.

Okay.

And then just a broad question, how do we think about your operating profit growth this year coming in well above your long-term target of 6% to 8%.

even with some of the challenges that we've talked about in the EU that should get better going forward.

When we think about that 6% to 8% long-term growth outlook and we look at this year's performance, is that number maybe somewhat conservative in your view and if trends stay relatively stable that there is actually potential for growth targets to be actually higher than what we are at this point?

No, look, our guidance is our mid to long-term guidance and that guidance remains unchanged.

So if I look at this year's results, then we are simply pleased to see that our innovation activities really begin to pay off.

that we see improved organic volume growth on our way to our mid-term target.

We are not there yet so that's a positive.

We see that our productivity cost reduction programs work, we see that we are able to realize pricing around the world, so we are happy about the constellation, but that doesn't change our mid-term guidance.

Okay.

Thanks Hermann.

You're welcome.

Thank you.

Your next question is from Jonathan Fell with Deutsche Bank.

Please go ahead.

Hi, there.

A couple things, first of all on the EU.

Just wanted to clear up this Czech and Poland thing.

Is there going to be any effect of you swallowing excise increases in those countries in the third quarter or has that already unwound as we speak?

Most of it is done.

Okay, thanks.

And the other thing on the EU was, I think last quarter when we were speaking about this there was some prospect in Germany of legislation, which could put a minimum tax of 20 cigarettes in place.

Where have we got to on that debate now?

Well, we continue to support it, as I said last time.

However, we regret that it looks like now that the 20-pack rule will not be implemented in the short term.

It doesn't mean that it cannot come back.

And any particular reason why -- what is causing you to think it won't be implemented in the short term?

Well, that's the news I have so that it is not been implemented, so all I can say and repeat and that's what we have also told the German government that we do support such a change in the law.

Okay.

And the other question was on the dividend -- don't see that, the information -- you talked about share repurchase, very helpful.

As I look at your quarterly rate of dividend now, $0.46, even at the low end of your EPS guidance range for this year, $3.32, the payout ratio will be coming in at 55% against your target of 65%.

Are you expecting the board to review that dividend rate at the end of August?

Well, look,the payout ratio is 65%, as you correctly say.

We are now at $0.46, which is 3.5% 3.6% dividend yield.

This is an entirely decision of the board.

We have regular board meetings throughout the year.

Yes, there is one at the end of August.

We will see.

This is within the entire discretion of the board.

But they haven't indicated to you yet when they might review that rate because clearly at most companies it's not a secret, really, when they start to review dividends?

The board will decide.

It is a board decision.

Okay.

I look forward to it, thanks.

Thank you.

Thank you.

Your next question is from Filippe Goossens with Credit Suisse.

Please go ahead.

Yes, good morning, Hermann and Nick, congrats --

Morning.

-- on a good quarter here.

A few questions here --

Thank you.

-- on our side, as well.

You talked about pricing in Italy, Switzerland and the Netherlands, but can you maybe just broaden the comment a little bit and talk to us about how the pricing environment or competitive environment more specifically is in European Union and how you look at potential room for price increases in both Germany and Spain.

If my memory serves me right I think German the last time you took pricing was in October of 2006 where Spain I think was early '07.

Filippe, I'm afraid -- I'm sorry that I will not comment on future pricing.

I can only really comment on what we did and I think our actions speak for themselves.

Okay.

Then second question, can you talk a bit about the ongoing restaging of L&M in the Russian market please?

Okay.

In the Russian market L&M, as you remember, we had revamped L&M both in the Ukraine and in Russia.

Yes, L&M is still declining in the Russian market, that's right, but if you take then as a comparison also the Ukrainian market, where actually we did change already before Russia, i.e., first, there we now can really see improvement, so it is really declining much less now in the quarter than it did before.

So we see a rejuvenation of the brand franchise, a more effective smoker profile, but I would like to focus there really, as well, on the portfolio aspect of franchising a market.

We attract ourselves with Chesterfield a number of the smokers that are actually leaving the L&M franchise, and as Chesterfield is priced two rubles higher than L&M this is actually even a much better margin.

And if you take L&M and Chesterfield together, then actually the Chesterfield growth outweighs the decline of L&M.

So we keep on working on L&M, but I urge you to look at it in a portfolio comparison, as well, and not only for the L&M brand.

But L&M itself we keep on going with our programs and we said from the very beginning that this is not going to be a short-term fix.

Okay.

Moving on to the Czech Republic, Hermann, when will the inventory adjustment be anniversaried?

Well, it depends.

If you talk about our brands then probably we will be the ones who bring the new consumer prices to the consumer first.

As I said, you have a couple of markets -- or market participants in there with durations of up to one year, so we will have to see when that comes, but I would expect in the Czech Republic that the fourth quarter becomes a normal quarter and then actually 2009 we could come back to a normal fair environment overall where there is normal competition in the markets so 2009 should be a normal market.

It's kind of now we are working our way through a messed-up market.

I think it's important also to mention here that Deputy Minister of Finance of the Czech Republic, although the final decision comes later in the year, has said that there are no plans to increase tobacco excise tax again as of January 1, 2009.

So yes, we should have it behind us soon, I hope.

Okay.

Then the other question I had for you, Hermann, is more a broader-based price question.

In the US historically people have always assumed that price elasticity of demand is about 0.3.

We've never really focused on the European Union in terms of what price elasticity is there, but the question I really have, Hermann, based on how you're seeing things develop, particularly in the European Union, given rising inflation across the board, do you think that this inflation is starting to perhaps have an impact on price elasticity?

In other words it's one thing to raise pricing 5% per annum, let's say, if there's no inflation in the general economy, but with household products companies, personal care companies, you name them, raising pricing anywhere between 5% and 10% could that ultimately have an impact on the price elasticity of demand for cigarettes?

Have you done any work on this so far, Hermann?

That is actually something which is almost impossible to answer.

Yes, we have done some work, but it's impossible to come at a clear conclusion.

You actually can argue the other way around.

You can say in a higher-inflationary environment people are more used to price increases because they see all products every day, while a low-inflation environment, if your cigarette prices go up only and nobody else's prices go up it might be even more difficult, so you can turn it around the other way.

All I can say is what I said earlier, that so far we haven't seen impact of inflationary pressures on our product.

And overall I think it is fair to say that cigarettes in general can withstand such an environment better than any or most other consumer products.

Great.

Thank you so much Hermann and Nick.

You're welcome.

Thank you.

Your next question is from Chris Growe with Stifel Nicolaus.

Please go ahead.

Hi, good morning guys.

Hi Chris.

I think we've covered a lot of the questions, but I had a couple follow up for you just relative to prior questions.

So the first one is that, could you quantify in the quarter or give us a feel for how much your volume was down in the Czech Republic?

I know it's been a tough market, but what sort of decline would you have seen in that market this quarter?

I In the quarter number for Czech Republic I don't have here, but it is such a screw up at the end of the day in that market that you really have to wait until it washes out.

At the end of the day with the measures we took on the marketing side, on the pricing side, on the absorption side we have defended our take in the market, if you like, and we look forward to more normal situation next year.

Okay.

Am I correct that you've already raised your prices to reflect the new tax level in the Czech Republic?

Yes, so you will see in the third quarter we will be the first one to pass on really to the consumer.

Yes, okay.

Then I want to ask two more quick ones.

The first one -- again in relation to an earlier question -- as you've raised your guidance for the year have you also reflect perhaps some increases in marketing or promotion in this higher guidance, so are your spending levels going higher even as your guidance is going higher?

Yes, we have reflected in that guidance that we have skewing of expenses towards the second half and we have reflected in that guidance the additional investments that we plan to make in a number of markets.

Okay.

Then the last question I have for you is related to volume.

In the quarter Marlboro was a little weaker than I expected, but you did have a little tougher comparison there, too.

Given all the new products benefits, a pretty robust R&D pipeline across your portfolio, is the second half of the year when you're closer or on track with getting at least within the range of your volume -- your long-term volume growth of 1% to 2%, or second half is that a period where you could see that even being a little below that long-term guidance?

Look, we will keep on working as much as we can on our innovation pipeline, on excellence in marketing and sales out in the market.

We are really pleased to see the improvement in the second quarter here.

We will do everything to stay on track and to keep on improving and to keep on refilling the innovation pipeline.

Then the second half could volumes be up closer to 1% or should we see see consistent progress, I guess I should say, sequentially in your volumes

I wouldn't want to change the volume projection that we have given earlier for the year.

I would rather prefer that we keep on working as good as we can.

Okay, thank you.

Thank you.

Thank you.

Your next question is from Jon Leinster with UBS.

Please go ahead.

Hi Nick and Hermann.

I have a couple a quick ones.

First of all, you've alluded a number of times to the marketing spend (inaudible) in the second half, as a percent of net revenues was there any growth in the first half or was it essentially flat as a percent of your sales in the first half?

Flat in the first half, growth in the second.

Great.

And just secondly, on the -- the EU proposals do include this idea of a much closer alignment between tax on factory-made cigarettes and roll-your-own, what do you think the future of roll-your-own (inaudible) is within the European Union if this proposal is passed in any shape or form?

First, the proposal is not full equalization, so therefore there will be alway a role for that segment because even in that proposal there remains a substantial price differential and tax advantage still for this type of product, so there will be always that part of the market.

Will there be in such a constellation more uptrading to cigarettes?

I would hope so.

Nevertheless, we are also very present in that market and we are increasing, as we speak, our presence in that market.

Take Germany as the best example or take the acquisition of the (inaudible) trademark as the second example.

So there is always some market there even with such a change in the excise system.

Do you think it's likely to cause a double digit or significant decline in volume in some of those markets where at the moment you (inaudible) questions on the tax even if the market continues to exist?

Well, it would be very much speculation at this point in time.

Let's wait until we have something more final there on what really is going to come out of the EU Commission, then you can see what that means in terms of roll over prices and then we can have better view of what it can eventually mean.

That's too early.

Lastly just on Japan, you obviously mentioned the cigarette market was down sort of 1.6% because of a trade purchases stock prior to implementation of the vending machine age verification.

I didn't realize that the market was reacting quite that way.

Why was there a big trade impact because of the change in vending machine age verification, and also, because my understanding is age verification has been done with machines over time and implemented over time?

And secondly, how successful has this sort of implementation of this sort of [task has] been, has it been a rapid shift, is there an ongoing rapid shift from vending to OTC in Japan?

Okay.

First, in terms of implementation that has been implemented really by region, by area, so now the Tokyo area was the last area where that was being implemented, now actually in July, so it's fully rolled out now.

You can -- in every area you had the load and the deloading impact, and then one deloaded, the next area loaded so it's very hard to read for the moment what the real impact is.

We will know in the next two or three months, because now it's everywhere.

The [taxable] card, actually where started as low as 15% or something in the area when it was the first area where it was rolled out, in that very same area the penetration is now about one-third of the people who have that card, so it's improving but it's, of course, still far away from 100% of the smokers applying for such a card, so over time it will increase.

Will there be a substantial shift into convenience stores?

Yes, and that's,, of course what we have prepared in our sales programs.

Does that mean, therefore, there might well be quite a substantial asset write-off of a lot of these vending machines [park] that exist, basically all of the tobacco companies and indeed some of the retailers, as well?

Okay.

No, I can, of course, only speak to ourselves.

In our case we did adapt our vending machine park already somehow before or that came in to place, so it's not a surprise for us and therefore there are now surprise write-offs that I would expect in that area.

Okay, thanks very much, cheers.

You're welcome.

Thanks, Jonathan.

Thank you.

Your next question is from Ann Gurkin with Davenport.

Please go ahead.

Hello.

Just wanted to ask you about leaf cost that you all highlighted in your March presentation, I think 550, is that still a number you're using?

Yes.

Look, the leaf situation is -- as I said before, this stays in the area of concern.

Supply is below demand, but really let me focus on that this is manageable.

Just maybe basis I give you the proportion simply hard numbers of the first half.

We have relief inventory sitting on our balance sheet of $4.1 billion.

That means duration of our leaf inventories are well beyond one year.

The year-to-date income statement cost expense of leaf in the first half of the year is $1.7 billion.

You have to put that into relation to the net revenues excluding excise tax, which is $13 billion, and the actual price impact that we have had -- price increase impact that we have had year-to-date June is some $50 million, so it's there.

It's $50 million is $50 million and we take it serious and you look at that how to increase supply, but the overall thing is, of course, manageable.

But that 550 number is that still a number you're using for 2010 or is that number going up?

That's the number we're still using, correct, yes.

Okay.

And then if I could just get an update also on China.

I think you all are licensing Marlboro production with the Chinese and vice versa distributing some of their brands, can we just get an update on that?

Yes.

The China domestic, the license production has actually started in two factories, in [Changsha] and in [Loyang], so we are very pleased that a major step forward and the products will be on the Chinese market in the month of August.

On the international JV side we are also progressing.

RGD, Red Golden Dragon, which has been launched in Czech is having 0.5% share, 0.4% in Slovakia and has just now been launched also in Poland.

[Dublese] we are doing, which is a mid-priced brand, we are doing test market launches now in the Ukraine and in Russia.

It's launched in Romania in May this year.

By the end of the year you're going to have six market launches out of the international JV.

So yes, we are making progress -- steady progress going forward.

That's great, that's all I have.

Thank you.

Thank you.

You're welcome.

Thank you.

Your next question is from Priya Ohri-Gupta with Lehman brothers.

Please go ahead.

Hello, just a follow up on your prepared remarks, if I could.

You indicated at the end of your remarks that you would expect to access to capital markets in the second half of the year provided that markets are suitable.

In the past I believe that you had indicated that if you were to come to market again it would likely be in Europe.

I wanted to know if that was still the case?

Then secondly, if you could just highlight your leverage target for the end of the year?

Thank you.

Okay.

Yes, we of course look also at other currencies, your first question.

Clearly it is not just the US dollar but also the other major currencies like euros,Swiss franks, that's what we look at.

The leverage for the year, well right now we are at net debt to equity ratio something like 0.4 so we keep ample flexibility and in that sense nothing has changed in terms of what we had said earlier, i.e., what the share repurchase program is and so on and so forth.

But that's the way we go.

Thank you.

You're welcome.

Thank you.

Your next question is from [Pam Yug] with Financial Times.

Please go ahead.

Hi, Hermann.

Just a couple quick questions.

One was just a follow up to the capital market, which the analyst before me just asked.

I was just wondering, how much are you looking -- what are your credit facilities at the moment and do you have any idea how much you would access in the second quar -- in the second half.

Well, we will decide that how much and the amounts once we get to the market, so that is something I wouldn't want to reveal already right now.

You have seen that we have done very successful a $6 billion bond offering in May at really what we believe very attractive rates, that's weighted a average of 5.7%.

That's, I believe, really, really good and we look at the other ones as they come and we look at the right moment what the market gives, then we look also at the right size.

So it's nothing you really can say well ahead.

And the funds raised would that be to continue the share buyback program or are you looking perhaps to fund acquisitions?

Look, it is for the overall business.

These funds provide us the flexibility for all of it; for share buy backs, for acquisitions should there be attractive acquisitions.

We always look at them, but I will, of course, not go further than that.

So really for the overall business it's nothing earmarked specifically to one or the other activity.

And this time last year we were just seeing a big wave of consolidation within the tobacco sector, do you think there is still room for further industry consolidation?

I do not expect the large scale industry consolidation that you have seen the last two years.

I would not expect anything of that size.

And given how sales and revenue -- given the sales and revenue performance in your European business, I was just wondering whether you can perhaps elaborate a bit more on your strategy for Europe, how you -- I mean, do you think growth will stabilize any time -- do you think sales or revenue will stabilize any time soon or are we looking at a continued decline in the European market?

The European market, I would say, is a market where, of course, in terms of overall market size this is going to continue to decline.

I think that European markets, EU markets will probably decline on a mid-term basis between 1% and 2% going forward.

That doesn't necessarily mean that revenues decline, because as I said the pricing power is intact.

So while volumes certainly will go down in that part of the world that does not mean that therefore profitability is going to go down.

That's the big difference to the emerging markets, but both mature and emerging markets in that sense are good markets, they're just different.

Do you see any acquisition opportunities for as far as your European business is concerned at the moment?

You mentioned earlier that the money raised is not earmarked for anything specific, but if there are any attractive acquisition opportunities that would be something you would consider.

Look, we always look at acquisition opportunities around the world and if they are a strategic fit and if they have attractive financial returns then we look at that wherever that is around the world.

At the same time we certainly have the financial flexibility to do them if we want to do them, but otherwise really have to stop it there, because I cannot go into geographies or potential targets.

What would be a market PMI would be interested in getting into?

Well, we are overall a tobacco company and not just a manufactured cigarette company.

So is that yes?

I think that's the answer.

Okay, that's fine.

That's all, thank you.

You're welcome.

Thank you.

Your next question is from Chris Burritt with Bloomberg News.

Please go ahead.

Hermann, thank you for your time.

Could you provide an update on your activities in China and how soon we're going to see the cigarettes coming and going to and from that country.

Okay, it really is -- our business in China is two fold, as I said, On the China domestic side where we are very pleased that the localized production for Marlboro in those two Chinese factories has started and on the international JV side where we are working with our Chinese partners on the commercialization of Chinese heritage products in the international arena.

That is key to our relationship.

I believe that we are today and that has always been our target, that preferred partner of CNTCI, China National Tobacco Corporation.

This is a huge company, this is a huge market and anything there you will see will take time.

This is not for tomorrow.

In our guidance we have always said that we don't expect in the short term a substantial impact on our financials, be it volumes or be it dollars.

However going forward this is, of course, an extremely important business development market and here I close the loop.

That's why we are happy that we have made progress again in the last couple of weeks with the startup of the license production of Marlboro.

And so would it be accurate to say that Chinese smokers are now able to buy Marlboro's made in their country or is it still in the production and distribution stage?

It is being produced now.

Distribution will start in August.

However, there will be certainly more demand in China than the supply will be.

This is a supply-driven market not a demand-driven market, so it's not that Marlboro is available in any desired quantities around the country.

It is a start.

Thanks for your answers.

Thank you very much, you're welcome.

Thank you.

Your final question is from Thomas Russo with Gardner, Russo, Gardner.

Please go ahead.

Pleased to play backup at the end of a terrific conference call, a long one.

Thank you Hermann.

Hermann, in your release you mentioned that one interesting factor was the Marlboro impact of the allocation of duty free in the US over to Altria from PMI, and I wonder how as you look out over time and PMI develops a portfolio in local markets and starts to look different from Altria's portfolio, how will this relationship best serve PMI's interest when travelers returning to their homelands look to buy products on duty free that may bear no relationship to those products which Marlboro naturally addresses.

So how will you get the proper marketing support and encouragement for those travelers with this arrangement?

Okay.

The split of a trademark between geographies is nothing unusual.

Yes.

You see it in many other trademarks, as well.

The gens and the origins and the backbone of Marlboro is what Marlboro stands for and nobody on either side of the Atlantic is going to change what really Marlboro stands for.

That being said, Marlboro has always been adapted to the taste, to the preferences of the consumers around the world and it's actually extremely important.

The best example is probably Marlboro Filter Plus, which has tremendous success in a number of markets.

Take one, the Romania, it's now 1.5% national share and 2.3% in the city of Bucharest.

I bet you that Marlboro Filter Plus as a one milligram would not sell much in the US, so it's a normal situation, I would think, and nothing that concerns me.

Great.

I'm thinking about some of the questions about the dividend payout ratio and it raises a broader question about the role of currency and reported results.

Assume a year-and-a-half from now we have a vastly different currency picture, what steps can PMI take going forward to protect against the possible -- the reversal of the dollar's decline on its OCI and on its net, and then accordingly on the dividend that you would naturally project from that net income.

What steps do you take to buffer against the OCI impact of currency?

Okay.

We always look at transactional exposures, I give you one example.

For example the dollar denominated purchases of leaf tobacco, that's something we always look at, but it's always transactional hedges.

We have not done in the past and it's not our policy to do any speculative hedges there going forward.

I believe we stick to our business, to our underlying business.

That has always been our philosophy in that area.

Thank you.

And by the way, just as an aside, the fact that you're up and running in China -- and it wasn't really highlighted on the printed release -- I think you're being far too modest.

I know that Louie has spent an enormous amount of time getting to this point.

I would have thought that you would have celebrated it a little bit more and that you're actually up and running and producing in China, that's quite a milestone.

Are there any Virginia-blend Marlboro's or is it an American-blend Marlboro that's being produced and are there any other western manufacturers in such a position today?

It is an American-blended product that is being produced there.

It is a true Marlboro in there.

So the difference -- and I will let others speak for themselves, but the difference really is that we have an agreement with the top of China National Tobacco and not just with the factory somewhere in the country that I think is key to future success.

We are happy about it, about the recent achievements in China, believe me.

Yes, thank you, I think you should be, congratulations.

Thanks Tom.

Thank you Tom.

Thank you.

I would like to hand the floor back to management for any further or closing remarks.

Okay.

Well, thank you very much for joining us today.

I just want to let everyone know that the investor relations team is available in Lausanne, Switzerland if you have any follow-up questions and you can reach us at the telephone number that's in our press release today.

Thank you for joining us and have a good day.

Thank you.

This does conclude today's Philip Morris International second quarter 2008 earnings conference call.

You may now disconnect your lines and have a wonderful day.