菲利普莫里斯國際 (PM) 2008 Q3 法說會逐字稿

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

Today's call is schedule to do 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 would now like to turn the call over to Mr.

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

Please go ahead, sir.

Welcome.

Thank you for joining us.

Earlier today we issued a news release containing detailed information on our 2008 third quarter results.

You may access it on our website at www.PMINTL.com.

As we take you through our results today, we will be talking about results in the third quarter 2008 and comparing them with the same period in 2007, unless specified otherwise.

References to market shares are PMI estimates based on a number of sources.

Net revenue data exclude excise taxes.

You will find a data table finding how we made adjustments to revenue in OCI for currency and acquisitions on the last slide of today's presentation which will be posted on our website.

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 is my pleasure to introduce Hermann Waldemer, Chief Financial Officer for Philip Morris International.

Thank you, Nick.

Hello, everyone.

It is a pleasure to report excellent third quarter results in the present environment.

We achieved cigarette volume growth of 4% and 3.2% excluding acquisitions.

Net revenues of $7 billion were up 17.5% on a reported basis and 7.2% excluding currency and acquisitions.

Reported OCI of $2.9 billion increased by 16.7% and by 7.2% excluding currency and acquisitions.

In spite of the foreseen skew in our marketing investments and expenses in the second half of the year.

Finally, reported EPS of $1.01 increased 23.2% and adjusted diluted EPS of $0.93 was up 19.2% of $0.78 in 2007.

These numbers track favorably to our mid-to long-term targets which is we shared with you in March.

Before I delve into more detail on these very strong results, let me first address the four key topics.

These are currency, our geographic balance, our Canadian acquisition, and our capital structure and liquidity.

In looking at currency issues.

Investors should remember that we are a global company with sales in some 160 markets and revenues in a wide variety of currencies.

The most important of which are the Euro, the Japanese Yen, the Russian Ruble, the Indonesian Rupiah, Mexican Peso and the Turkish Lira.

This wide basket of currency means that there are often are offsetting effects.

Furthermore, while the Euro is the most important currency in terms of revenues, we have significant offsetting costs in Euros and Swiss Francs.

During the third quarter the overall effect of exchange rate movements was positive to the tune of $217 million on an OCI basis.

The growing strength of our business as reflected in our quarterly results enables us to reaffirm our full year 2008 guidance for adjusted diluted EPS of $3.32 to $3.38 representing a growth rate of between 19 and 21%.

At current spot rates, our results should come in at the lower end of this range which is in line with current consensus estimates.

During the quarter we generated 28% of our volume and 44% of our OCI in the mature and stable EU Region.

Asia which has a mix of mature markets such as Japan and emerging markets such as Indonesia, contributed 25% of our volume and 19% of our OCI.

The EEMA and Latin America and Canada regions which consist predominantly of emerging markets accounted for 47% of volume and 37% of OCI.

We believe this represents the best geographic balance in the tobacco industry.

Furthermore, I would like to emphasize that in our key emerging markets such as Indonesia, Mexico, Russia, Turkey and Ukraine, we have continued to witness consumer up trading to mid-and premium priced products in the third quarter.

Although we cannot exclude an eventual impact of the global financial crisis on consumer behavior, we remain very upbeat about the future and the resilience of our business in these markets.

Our geographic coverage is being further enhanced by our successful acquisition of Rothman's Inc.

in Canada.

This acquisition is both financially and strategically compelling.

It provides us with a strong position in one of the five largest international markets in which we have a limited presence.

The investment of just over CAD $2 billion is expected to provide attractive returns going forward.

Rothman's is a growing share of about one third of the very profitable Canadian cigarette market, and is the leader in the fine cut market.

As previously disclosed, the acquisition will be modestly accretive in 2009.

Following the announcement of the tender offer, we received some questions from analysts and investors regarding the litigation environment in Canada.

Let me reemphasize that we considered the issue of litigation very carefully before we made the tender offer.

Our traditional defenses remain available and strong including common knowledge of the health risks of smoking, absence of product defect, compliance with government policy, a defense similar to prevention in the US and flowed statistical models to mention a few.

The [amised legal team on the the chalk wall] has a vast amount of experience in this domain and we believe that the Canadian litigation environment is and will continue to be manageable.

The Rothman stock was delisted at October 20th and we now own 100% of the company.

The Canadian business results were incorporated into the Latin America and Canada region as of September 19, but were immaterial for Q3 results.

As you know, PMI has a prudent approach to its capital structure, and our business generates a formidable cash flow which underpins our healthy liquidity position in these turbulent times.

Earlier this year we successfully issued bonds for a total of $9 billion nominated in dollars, Euros and Swiss francs.

Thanks to our strong credit rating, we have had an uninterrupted access to the tier one commercial paper market.

We have currently $1.4 billion outstanding at an interest rate of 2.4%, which is well below LIBOR.

We have established a committed revolving credit facility of $6.4 billion, which remains undrawn.

The strength of our business fundamentals and our strong cash flows underlie the decision made on the 29th of August by our Board of Directors to increase the quarterly dividend by 17.4% to $0.54 representing an annualized rate of $2.16, which at the current share price represents an attractive yield at 5.1%.

Since May we have spent $4.5 billion against our $13 billion two-year share repurchase program.

We are well ahead of schedule, and therefore are in a comfortable position to appropriately and prudently balance our fourth quarter share repurchases with developments in the financial markets over the next few weeks.

In reviewing our third quarter results, let me first focus on the overall strength of our superior brand portfolio.

Our cigarette volume reached 225.9 billion units, an increase of 4%.

Excluding acquisitions, volume increased by 3.2%, which represents our best organic volume performance in many years reflecting continued consumer up trading, new product initiatives, and enhanced communications and consumer engagement activities.

More importantly, this volume growth was accompanied by higher pricing in most key markets, resulting in a 7.2% increase in net revenues excluding currency and acquisitions.

EEMA, Asia, and Latin America and Canada regions achieved strong organic volume growth while the decline in the EU region was broadly in line with the overall market decline.

The vast majority of our key brands including Marlboro had positive volume trends.

Marlboro shipment volume increased in the quarter by 1.1% to 80.3 billion units.

Marlboro shipments were up in all geographical regions except the EU.

Strong results were achieved in a wide variety of markets such as Argentina, Indonesia, Japan, and Ukraine.

Our [enormative] line extensions are helping to strengthen the vitality and overall excellence of the brand.

Marlboro Black Menthol, for example, achieved a 1% share of the Japanese market in September.

This is the best result in recent years for any new brand in Japan.

Despite some cannibalization, this launch enabled Marlboro to gain 1.4 share points compared to the previous quarter and PMI to reinforce leading position in the growing Menthol segment in Japan.

Marlboro Filter Plus continues to grow and is being further rolled out geographically.

For example, it achieved a 3.1 share in Bucharest, 2.1% in Kuwait and 0.9% share in Moscow with a strong skew towards young adult smokers which we define as smokers between legal age minimum 18 and 24 years old.

Other new initiatives behind Marlboro include the further geographic expansion of the shorter Marlboro Intense, the introduction in Latin America of new Menthol variants, and the launch in Poland of Marlboro Gold Edge, a super slims variance.

Parliament shipments were up 15.1% thanks to tremendous momentum in Korea, Russia, Turkey and Ukraine, while Virginia Slims volume was 3.6% higher.

We are further reinforcing Parliament in Russia and Ukraine with the launch during the fourth quarter of the Luxury Super Slims Parliament Reserve, while Virginia Slims is benefiting from the growth of its uno variance.

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

While L&M continues to be an issue in Russia, the brand appears to have stabilized in Romania and Ukraine.

Outside of the EEMA region, the volume of L&M grew by 3.7%, driven in particular by Germany where L&M is the fastest-growing brand in the market.

The growth of Chesterfield which is generally sold at the higher price, is more than offsetting the decline of L&M.

Shipments of Chesterfield increased by 14.6% in the quarter driven by strong results, particularly in Italy, Russia, and Ukraine.

While we focus our efforts on the more profitable, premium and mid-price segment, PMI also has three strong international brands in the low-price segment.

During the third quarter the combined shipment volume of Bond Street, Next, and Red & White increased by 12.3%.

In addition, our local heritage brands in such markets as Indonesia, Italy, and Mexico are performing well.

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

Industry cigarette shipment volume in the EU region is estimated to have declined by 1.2%.

Our cigarette shipment volume decreased by 2.1% reflecting the total market decline, unfavorable distributing inventory movements in Italy and the timing of shipments in Spain.

Constant currency net revenues and OCI were both up 1% with increases across all major markets except the Czech Republic and Poland, which were impacted by the need to temporarily absorb excise taxes as well as the overall market decline in these two countries.

We are particularly pleased by the progress in the very important German market that we gain share in both the cigarette and fine cut categories.

During the third quarter, we continued to achieve very strong results in the EEMA region with volume up 5%, net revenues excluding currency 14.9% higher, and OCI excluding currency growing by 25.5%.

These strong results were driven by continued volume expansion and an improved mix due to our strong position in the premium segment in Russia, Turkey and Ukraine.

Higher prices further boosted our profitability in these key markets to record levels.

Cigarette shipment volume in Asia grew by 5.6% to 55.9 billion units with growth in Indonesia and Korea more than offsetting the impact of the market decline in Japan.

Net revenues excluding currency were up by 7.8% and OCI excluding currency was 8.6% higher thanks to favorable volume, mix, and pricing.

We are very pleased with our progress in Japan with sequential total market share growth and a strengthening of our leadership in the growing Menthol segment behind Marlboro Black Menthol, Lark Menthol X and Virginia Slims [Nual].

Our shipments in Indonesia increased 2.2 billion units or 13% driven by the strong performances of Marlboro and A Mild.

As well as the timing of Ramadan which resulted in an estimated 800 million units being brought forward from the fourth to the third quarter.

The other key highlight in Asia was Korea, that our shipment volume grew 28.1% and share was up 2.3 points.

Latin America and Canada also had a strong quarter.

Our cigarette shipment volume was up 6.5%excluding acquisitions.

Net revenues excluding currency and acquisition increased by 7.8% and OCI excluding currency and acquisitions was up 4.2%, excluding the $61 million distribution related charge in Canada.

These strong results were driven by all our key markets and by Marlboro, the shipment of which were up 3.3%.

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

The outlook for the EU region is expected to improve with pricing power remaining strong and enhanced competitive position notably in Germany and an end to the distortions in the Czech markets.

Enhanced innovation is driving improved organic volume.

We are on track with our productivity and saving programs.

We have increased our dividend and continue to enjoy a strong balance sheet and healthy cash flows.

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

We firmly believe that we're well placed to weather any potential future consequences from the current global financial crisis and to continue to deliver a superior performance for our shareholder.

I will now be happy to take your questions.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Jonathan Fell with Deutsche Bank.

Good morning or afternoon, everybody.

I have a couple of questions actually.

First of all, just to clarify your remarks on the buybacks, it doesn't look as though the current credit situation has impacted the repurchases to date, but it sounds like you are expecting in the fourth quarter that the rates will be lower than it's been.

Can you give us any guidance at all on exactly how much lower the rates of repurchase will be?

Is the question at the moment that you can't buy any back at all or do you expect at least to be able to continue to do some once the close period ends?

And secondly, on EU, you have been very consistent in saying the outlook should improve next year and pricing is strong, how much of a concern is it in particular in the [anti valorem] markets like France, Spain, and Italy that if the industry doesn't move pricing up quite soon, governments might do it for you given the increasing holes in their budgets?

Okay.

So let me start with your question to the share repurchase program.

This is an ongoing program.

We will keep on going with our share repurchase program.

What I wanted to say with my remarks is that we are actually in the good and comfortable position, that we are ahead of the schedule and that we now can simply watch and see what the market situation is out there in the financial markets.

I mean, we all have witnessed the turbulences up and down every day.

This is simply what we look for and what we watch out for, but, look, let me put it this way.

A company of our strength, our liquidity, our balance sheet, is of course probably always amongst the ones that can access those markets first.

It is just we have to comfortable position of doing what's necessary and best for both the Company and the shareholders.

That's the share repurchase.

On the other question EU.

Here, look, I mean yes governments are also in budget season right now, but I can tell you that in neither one of the three countries that you quoted France, Spain or Italy, there is really discussion out there about significant excise increases.

So I I don't see those, and I hope also that this won't change from here to the end of the year.

Alright.

Thanks.

You're welcome.

Your next question is from the line of David Adelman with Morgan Stanley.

Good afternoon, Hermann and Nick.

Good afternoon, David.

Hermann, first, just to be clear, there is still no change in the commitment to buy back $13 billion in your stock through I guess March of 2010, correct?

This is correct.

This is the $13 billion share repurchase program over two years.

Okay.

Secondly, Hermann, as it relates to emerging markets, I heard your comments in your prepared remarks, but did you see any change in the tone of business as you went through the quarter and came into October?

Look, no.

I mean the thing is really, I mean, the down trading that everybody is referring to or is afraid of, we just have not seen that anywhere around the world.

Really, you go to Asia, you go to Indonesia, where you have a 12% inflation year-on-year right now.

Our volume up 13%, Marlboro is growing share, A Mild is growing share in the market.

I mean, the only thing you eventually can see of course low price segments are growing as well.

Maybe they grow a little faster than the mid- and the premium segments, but they all grow, so there is no down trading there.

Russia to go to a different part of the world, our volume is up 8%.

Our shares are up actually.

Parliament is up.

Marlboro is up.

Chesterfield is up.

Just L&M is down, but it is a brand related question and not a down trading related question because smokers actually trade up, for example, to Chesterfield.

The same would be valid for the Ukraine.

Or if you then go to Latin America, actually in Argentina where we have fantastic results, and Marlboro being up, Philip Morris being up, the only brand that is down there is Next in the low price segment and Latin America overall I would call an up trading environment.

Okay.

And then, Hermann, if you think about the potential risks in those markets, particularly as it relates to the results that you would demonstrate over the next quarter and year on a US dollar basis, what do you think of as being the principle risks to the delivery of US dollar profits out of those markets?

Is it currency?

Is it the local operating profit results?

Is it the threat of excise in a weaker market?

Is it stress on the distributors financially?

Look, I think -- I mean, the key to everything I will say is that first of all we deliver on our constant currency targets and that's what we have done the last three quarters and that's what we intend to keep on doing.

I think that's the key to it.

Okay.

I mean, in those markets that you quoted, I mean, down trading I just gave you, the onset, I haven't seen it.

Our own financial strength is certainly untapped.

Okay.

And two other quick things, Hermann.

Any update on the discussions within Japan on a potential substantial excise tax increase in that market?

No.

There is actually not -- no, not much news there.

The 45 MPs which are working on that proposal, but this is not the government.

This is the partisan group of MPs working on it, they haven't even come out with a proposal yet.

Okay.

And then lastly, Hermann, on Rothman's, in terms of getting approval for that transaction, did you have to commit to any particular employment numbers or maintaining the plants for a certain period of time and will that adversely affect your initial intended return?

Look, I mean, we will keep the manufacturing sites there and actually modernize them, so we keep those with pleasure.

And we are very happy to have that excellent organization now within our company, within our family.

So there is no issue from that side.

Okay.

Thank you very much.

Thank you.

Your next question is from the line of Adam Speilman with Citigroup.

Hello.

It is Adam Speilman here.

Hi, Adam.

To be fair, a lot of my questions have been answered already, but I just wondered about Jonathan's question a little bit more detail.

Bearing in mind your balance sheet is so strong, bearing in mind the stock has fallen as much as it has, do you think there is any chance you will actually accelerate the buyback program to take advantage of the low stock prices?

Look, I think I can only repeat what I said before, that we are in this very comfortable position that we can watch the situation out there in the financial markets and do the best thing depending on how those markets develop.

It is just pretty much impossible to forecast these days what the financial markets are doing.

Thank you very much.

We are and remain committed to our share repurchase program.

Thank you.

And another question if I may as well, and this is regarding emerging markets.

Obviously in the past year or two there has been quite a lot of consumer inflation in emerging markets.

Maybe that's one of the reasons you have been able to put up your prices in that say in Russia and Ukraine and similar.

If inflation generally slows down, do you think that means to say that your ability to put up prices on brands like Marlboro in these markets will be reduced or do you think the general inflation level is in fact completely irrelevant to your business?

I don't think so.

I mean if you look into a couple of the key markets take Indonesia as example, actually our price increases generally have been even below inflation there.

So we didn't over do it in those markets, and if you don't over do it in year one, you don't regret it in year two.

So I think we are well equipped there.

So you can continue to take pricing in the market like Indonesia or wherever you happen to choose even if inflation becomes less intense?

Yes.

Thank you very much.

Your next question is from the line of Judy Hong with Goldman Sachs.

Thanks.

Hi, Hermann.

Hi, Judy.

Hermann, I know you said in the third quarter the operating profit ex currency slowed down because of some of the timing issues.

Is there any way to quantify how much of the spending the timing related spending increases or expenses sort of put a little bit of a damper in terms of the operating profit growth?

Look, I mean, the specific marketing investment which we have made individual markets for competitive reasons, that number I really wouldn't want to give.

It is clear and obvious that we have invested in Japan and we begin to see the positive effects of those investments.

All that was from the very beginning included in our forecasts.

And again I would say if you look at our -- if you compare our ex currency results, and then you compare them to our mid-to long-term guidance, we fair pretty well against those.

Hermann, I know you don't typically give guidance on following year until you report the fourth quarter.

But just in terms of how you think about '09 at this point just given some of the economic conditions around the world.

Obviously you've got the currency issue, and then offsetting that you still have the cost savings that are coming through.

In '09 are you comfortable still looking at on a constant currency basis in line with your long-term target?

Absolutely comfortable with our mid-to long-term targets on a constant currency basis that we have given, yes.

Okay.

And on currency I think in the beginning you talked about some of the offsetting factors.

If you could just elaborate that and as we think about the currency impact in '09, how should we think about all those offsetting factors as well?

With pleasure.

Look, I mean the start of course is that, yes, currency movements have a substantial influence on PMI's dollar results.

The last time it has been unfavorable was actually 2006 where it was unfavorable with some $180 million, it was $470 million favorable in 2007, and now year-to-date we are favorable $750.

But really that's what I was referring to, currency of course don't move all in one in the same direction.

I mean, the recent moves of the US dollar versus the Euro and on the other hand versus the yen is just living proof of what I say.

And we have many other currencies that we work in around the world, and take, for example, the Indonesian Rupiah, which was stable against the dollar with 5% swing only.

In the Euro exposure, I believe sometimes maybe overestimated that we really have.

Of course just to take 46% of OCI which is the portion of the EU, as the exposure will be misleading because we have substantial Euro expenses.

For example, to make one example for product sourced out of the EU, for the Japan market.

So there is substantial Euro expense out there, and then second and very important we have very substantial Swiss Franc expense.

It is the operation center here in [Lousanne], it is the R&D center also in Switzerland.

And do you remember our R&D expenses they're on a yearly basis and in the equivalent of $300 million.

And the Swiss Franc is of course the currency strongly related to the Euro, correlated to the Euro.

So here you have a further netting against the Euro exposure.

Therefore the Euro net income exposure is of course substantially lower in percentage than the percentage of U OCI compared to the overall OCI of PMI.

Okay.

That's helpful.

Thanks, Hermann.

You're welcome.

Your next question is from the line of Chris Growe with Stifel Nicolaus.

Hi.

Good morning, Hermann.

Good morning, Chris.

Hi.

I have just a couple of follow-up questions for you.

The first one is in relation to investors concerns and it is appropriate one about a trade down in whether it is an emerging markets or developed markets.

Could you tell us in this quarter how well premium versus say mid-tier versus the low end did for your business?

Look, I mean the overall segment if you will try really to go a little bit on the overall segment size that you have out there, then actually the premium segment and the mid--priced segment on a worldwide basis would be growing.

So our latest internal estimate there would be the premium slightly growing to 26, a bit above 26% worldwide and talking now mid-price with growth of a bit more than a percentage point to 29% in the neighborhood of 29% and the low actually being down to something like 1.5% to 44%.

That will be roughly the picture that you see on a year-to-date basis out there.

So and then if you go a little bit into the regions if you like, EEMA and Latin America, they are clearly up trading to mid and premium, and I would say there was some talk about down trading in the EU.

I think that has never happened.

What actually has happened, the consumers were down traded by some companies via the repositioning of their brand to the low price segment.

That's actually very helpful.

Thank you.

And then I wonder if you can say if there has been any difference between consumption and shipments in any of your major markets.

I think of Russia, for example, where you could have wholesalers working through inventory and not repurchasing as quickly.

Are you seeing that now in any major markets?

No.

I mean, the only really meaningful impact is the one that I quoted on Indonesia where just because the timing of Ramadan we had 800 million.

But in terms of really our trade bringing inventories down or even up, you can argue either way, no, I am not seeing that.

We are actually watching that also quite closely.

I mean, look, if you take our trade receivables at the end of September, there will be 2.3 billion.

Our top 50 customers around the world are 90% of that.

So we of course follow them individually and closely.

There are credit limits in place with every one of them, and then this industry and in particular in our company, I mean we have short payment terms, ours are below two weeks.

Okay.

That's great.

My last question for you is if you can give us any kind of update on the progress that occurred in the quarter in China as well as the joint venture you have operating outside of China and that's fully operational there and especially in Europe?

Okay.

Look, I mean Marlboro is up and running as you know.

On August seven, the locally produced Marlboro was launched in China.

In terms of the international joint venture, we have essentially now launches in all three price segments, in the low segment that is RGD.

It has a launch to date market share in the Czech Republic of 2.6%, in Slovakia of 1.1, Poland of 0.7, so going very well.

[Dublese subeche] is manufactured in our [Azora] factory is a mid-price brand which was launched in two cities in Russia and two regions in the Ukraine.

Well, that launch is too early to give shares, but that's working fine.

And the latest news is that actually just a week ago or so we launched the first premium brand which is Harmony in Argentina.

It is actually launched at the price of Marlboro, a premium cigarette touch of the audience.

So you see we also go for the premium segment and for the most difficult launches in that joint venture, and it is going well.

We're very happy we're making progress every day.

That sounds like you're in about maybe six markets, and that's if I am correct where you want to be by the end of the year.

Are there other market shares you're looking to launch into?

This year no.

Other markets going forward, of course, yes.

In 2008, though?

In 2008 we are done.

Okay.

Thank you very much.

You're welcome.

Your next question is from the line of Eric Bloomquist with JPMorgan.

Hi, Hermann and Nick.

Hi, Eric.

Just wanted to follow up on a number of things.

Firstly with respect to the cost savings, could you -- I know you said that you were on track.

Can you give us any more detail on approximately how far along we are in the cost savings and reconfirm the potential timing of the savings over the next three years?

Okay.

Look, I just went through that some ten days ago.

Yes, we are on track to deliver the $1.5 billion and we will deliver the first $500 million this year, the first third.

Things are on track.

We have the US volume transfer over to Europe.

Remember still in 2007 there was about 57 billion cigarettes produced by PM USA for PMI.

All of that has been absorbed, they still produced about 25 billion this year still for us, it has happened now.

The financial service centers are up and running and delivering very nicely.

So all the programs individually are on place.

You have swings between one and the other, but if you add it up, you're right there.

Sure.

Secondly, then, I was wondering if you could comment a little bit on the outlook for leaf costs?

Again, coming back to March, that was expected along with other raw material costs to be about a 5$00 million drag.

And of course with US dollars strength that means I suspect that lease costs may be somewhat declining.

Can you talk about the overall outlook for that?

And then as a secondary issue could you talk about the issue of having to provide financing for farmers to grow the leaves and if indeed that's something we should start and try to factor in as we're thinking about the cost base for PMI?

Okay.

On the leaf situation overall, I mean for the 2008 situation, and I am comparing with 2007, we have about a P&L impact year-to-date of $90 million, something like that.

But you have really to put that into perspective.

You remember that typically you have three crops going into one blend.

The total leaf costs that you see on a yearly basis is about $3.2 billion.

So we talk about an increase eventually of 5% of the leaf costs for this year.

And then again I would like to put it into the context of the total cost of goods sold, which for the year is in the range of $9.5 billion.

So therefore $90 million or $150 for the year for increased leaves is relative terms something that you simply have to live with.

Leaf prices in the year 2008, yes, they have gone up quite a bit.

The costs of a kilo was up 15 to 20%.

What you already see now is the cyclical effect that the next harvest is already expected to be larger.

So the supply is being expanded.

The seeds are in the ground now.

We know that, that the next harvest is going to be bigger.

And then of course you also have the currency effects, the dollar on one side, but on the other side, also the Brazilian Real because underlying although the leaf is denominated in dollars, there is an underlying Brazil Real impact in there.

So on the overall outlook for the three years to be seen, it could be somewhat higher between $100 and $200 million to compare to the number that we had at the beginning.

However, let me emphasize there that definitely has no impact on our mid- to long-term guidance.

That will be absorbed either through additional productivity or the revenue line or we will see and that's why I gave you the other numbers to put it into context and into the proportion.

Okay.

The question of financing of farm.

That has always been part of the program, the leaf dealers that farmers are being helped, so that is nothing new at the end, and therefore nothing new that you need to factor in.

Okay.

And there is not a risk of the leaf dealers being squeezed and that some of that financing having to move to reside with the manufacturers in your view or with PMI?

Well, look, I mean that is rather really the question of the financial crisis is that having any impact on key suppliers.

I mean the way we work with key suppliers is that in the case of leaf, we of course have commitments to them.

They know in roughly what we are going to buy, so that is much more foreseeable for them than for, say, the supplier of a car manufacturer which not only has to suffer his own financing problems eventually but also a much reduced demand by the car manufacturer.

Our business is stable in that sense.

Our volumes are stable or growing and therefore planable.

At the same time we of course have a principle on all major materials in place that we have at least a dual sourcing for key ingredients, filter top will be the other one.

We actually have four key suppliers around the world.

So, yes, we're watching that, but it is all manageable as much as we can see.

Okay.

Super.

Lastly, it seemed to me that looking at the underlying volume trends in key west European markets like Italy, Germany, even France, Spain, that the environment looked pretty good for future price increases.

Is that a fair assumption?

I will not comment about future price increases.

I am sorry.

Okay.

Thank you.

You're welcome.

We will now open the call to our media representatives.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Thilo Wrede with Credit Suisse.

Good morning.

Thilo Wrede here.

First question in just housekeeping question, what would you consider your normalized tax rate for the quarter, for the third quarter?

Our tax rate is -- our ongoing tax rate is between 29 and 30%.

Okay.

Because you had a few factor that impacted the tax rate this quarter?

There are always one-time effects that can happen, but the ongoing rate is between 29 and 30.

Great.

Then looking at the EU market, with the continued down trading there, how do you see the future of Marlboro in that market?

Look.

There is -- in my opinion really and I am convinced about that, there is no and there has not been a down trading in the European markets.

What has happened in western Europe is that a number of brands, competitive brands, that have been in the premium or in the mid-price segments were repositioned to the low-price segment which as we both know is not that far away.

I mean in Germany you talk about the price cane up of $0.40, and in Italy you talk about $0.70, Spain would also be $0.70.

So it was really consumers being down traded and not consumers down trading.

There is a big difference in my opinion.

In the EU and maybe there take the German situation, yes, Marlboro has been under pressure because of the reason that I was just quoting, and we are working on it.

This is what we have to answer and what we are answering with our product innovation, with our refilling of the pipeline, with our focus on the brand.

And we clearly can see, for example, in the key German market that, yes, Marlboro is still declining, but at a much slower pace.

This is very much improving, and we will keep on working to get even better.

Nevertheless let me say also in the German market we talk about 24% of market share from Marlboro today.

So it is not that bad, and at the same time what we of course in such a situation had to do and our German team did an excellent job there, is you have to answer the challenge and the answer was L&M which is now the fastest growing brand in the market which is year-to-date up more than two share points to 6.8%, and has a young adult smoker share of 10%.

And now we don't go just the cheap way again, no, we bring out L&M Night as an image version if you like of the L&M brand at the $0.10 premium to the regular L&M.

That's how we tackle those situations, and I have full confidence that we will keep on being successful there.

Okay.

That was helpful.

Since you mentioned Germany, I am getting the impression that there are efforts going on in that market to repeal some of the smoking bans there.

Is that something you are seeing?

What's the outlook for the smoking bans in that market?

Well, okay, there is some easing due to recent election results in some states, to some court cases.

I mean, overall it will be eased.

It will be a bit more consumer friendly, smoker friendly I would say.

However, overall in the long-term I don't expect reversal of public smoking bans.

I would just expect a more smoker friendly implementation of those public smoking bans.

Okay.

And then last question on the Czech Republic.

How much longer will the trade inventory movements there impact your results in that market?

Okay.

So actually I would say -- I would hope that the mess is behind us there.

So by now I would say 90 to 95% of the products out there are in the market now at new prices.

So finally almost one year after the last brands have come in with the new prices.

Going forward therefore I really expect now a situation that is coming back to normal.

The good news in the Czech Republic is that there is no excise tax increase foreseen in the budget bill.

It is going to be voted in November, but there is no excise increase foreseen in there.

And I would say we are then in a normal environment well-positioned with a very strong and very broad portfolio covering actually all the price clout it's covering international and local brands that we should be able to recover some of the positions that we have lost due to this unfortunate forestalling in that market.

All right.

Thanks a lot, Hermann.

You're welcome.

Thank you.

Your next question is from the line of Thomas Russo with Gardner, Russo, Gardner.

Hi, Hermann.

Hi, Tom.

How are you?

Hi Hermann.

Two questions.

First, what steps helped drive Korea so sharply up this year?

Innovation.

Our team in Korea is doing a fantastic job there.

Really Parliament is on fire.

Marlboro is doing very well.

So this is really product innovation, excellent marketing, excellent sales in there -- a true success story from that point, so this is not pricing nor excise.

This is a true marketing and sales success story.

Terrific.

And then in both the quarter and the nine months, you continued to spend quite substantially on marketing, the lye marketing administration and research, so for the three months at least it was up almost 30%.

What is behind that?

It is up to $1.5 billion versus $1.1 billion prior year.

Okay.

There is of course in the numbers I don't have in front of me, but there is of course there must be some currency effect there, I guess.

Yes.

But there is reinvestment in there as we have said, said, and the skewing of expenses really towards the second half of the year.

I mean, you can see that our innovation pipeline which needed to be refilled has been refilled, and now we are going out with all of these launches.

You see the success on the revenue and on the volume side, but of course it doesn't come without investment.

Thank you.

You're welcome.

Your final question is a follow-up question from the line of Chris Growe with Stifel Nicolaus.

Hi, Hermann.

Thank you for the follow-up.

Sure.

The only question I had was regarding there was a $61 million one-time item in Latin America that it looks like you're including in your $0.93 you will have operating EPS, is that correct?

That is one-time in nature, though; correct?

That's right.

Distributed terminations happen from time to time in the business.

That's why such a charge is in underlying, and not just in the reported.

Okay.

And again that's not there, next year, you have that benefit then with your Latin America division in the third quarter?

Yes, true.

Okay.

That's all I needed.

Thanks so much.

Okay.

You're welcome.

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

Nick Rolly for any closing remarks.

Okay.

It is still Hermann.

I would like to make one last remark before we conclude this call.

In these difficult times for the worldwide economy.

No business in the world is actually recession proof, but I am convinced that our business is very recession resilient.

There is no replacement product to cigarettes, and our smokers are very loyal to our brand.

Nick.

Okay, Hermann.

Well thank you very much.

As we did in the second quarter, the Investor Relations team is available in Lousanne and you can follow up with any questions.

The phone numbers are posted on the website and also on our press release.

Thank you again for joining us on this call.

Have a great day.

Thank you for participating in today's Philip Morris International third quarter 2008 earnings conference call.

You may now disconnect.