菲利普莫里斯國際 (PM) 2008 Q4 法說會逐字稿

Good afternoon and welcome to Philip Morris International 2008 fourth quarter and full-year 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 available to ask questions following the conclusion of questions from the investment community.

I would now like to turn the call over to Mr. Nick Rolli, 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 fourth quarter and full-year results. You may access the release on our website at www.pmintl.com.

As we take you through our call today, we will be talking about results in the fourth quarter for the full-year 2008 and comparing them in the same period 2007 unless specified otherwise. References to volumes are for Philip Morris International shipments and net revenue data exclude excise taxes. You will find data tables showing how we made adjustments to revenues and operating companies income for currency and acquisitions on the last two slides of today's presentation which will be posted on our website.

Prior to 2008, certain of PMI subsidiaries reported their results up to 10 days before the end of December rather than on December 31st during 2008. These subsidiaries moved to a December 31st closing date. As a result, the first and fourth quarter results of previous periods have been revised to reflect this change. And we have provided the revised quarterly information for 2007 and 2008 on schedules nine through 12 of today's earnings release. The effect of this change for the year was not material to PMI's consolidated financial position, results of operations, or cash flows.

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 review of the various factors that could cause actual results to differ materially from projections.

It is now my pleasure to introduce Louis Camilleri, Chairman and Chief Executive Officer, and Hermann Waldemer, Chief Financial Officer who will join Louis for the question-and-answer period. Louis.

Thank you, Nick. Good afternoon, ladies and gentlemen, and thank you for joining our review of our first full-year results as an independent company as well as our expectations and guidance for 2009.

In March, we shared with you our mid to long-term volume and constant currency targets for net revenues, operating income, and earnings per share. In 2008, we achieved or surpassed all of them. We plan to do the same in 2009. But as I shall discuss later, our results this year will be adversely impacted by a significant currency hit should current rates prevail throughout the year.

In the fourth quarter our cigarette volume growth momentum continued with increases of 2% and 0.6%, excluding acquisitions. As a result, for the full-year, our cigarette volume was up 21.1 billion units to 869.8 billion, representing a growth rate of 2.5% and 1%, excluding acquisitions. This marks a significant improvement over our performance in recent years, and was achieved despite above-trend market declines in the EU region and Japan.

Emerging markets were the principal growth driver of our solid volume performance with particularly strong results in Algeria, Argentina, Bulgaria, Egypt, Indonesia, Korea, Mexico, Russia, Turkey, and Ukraine. In these markets, we benefited from overall industry volume growth and consumer uptrading to our premium and mid-priced brands. This dynamic continued through the end of the fourth quarter. Illustrated by the fact that during the quarter, our revenue growth, excluding currency, in key markets such as Argentina, Indonesia, Mexico, Russia, Turkey, and Ukraine, remained robust, and essentially in line with and in several cases exceeding the annual trend.

As of yet, we have not witnessed any evidence of a shift in consumer behavior in our principal emerging markets. While the rate of uptrading appears to have slowed in very recent weeks, in some markets, and most noticeably in Russia, no sign of consumer downtrading has yet been detected. This is obviously good news. We must, however, recognize that the year has barely started, and the global economic crisis is still unfolding. And accordingly, there is no certainty that these trends will be sustained. Having said that, we believe that any shift, were it to happen, would be mitigated by both the fact that the premium segment is still of moderate size in numerous emerging markets, and that absolute and relative retail price levels have not reached prohibitive levels.

Net revenues in the fourth quarter grew by 3.6% on a reported basis, and by 5.6% excluding currency and acquisitions. For the full-year, net revenues were up $2.9 billion to $25.7 billion, representing a growth rate of 12.7% on a reported basis, and 5.6% excluding currency and acquisitions. Net revenue growth has been driven by our good volume performance, significant increases in prices across all regions, and a favorable product mix. Of particular note is that the organic revenue growth in the fourth quarter was equal to that of the full-year.

Operating companies income, or OCI, in the fourth quarter suffered a substantial currency hit and was substantially even with the corresponding prior year period. However, excluding acquisitions and currency, OCI was up 7.4%, or $171 million. In spite of increased expenditures of some $100 million, in brand building in several key markets, including Indonesia and Japan. For the full-year, OCI reached $10.4 billion, an increase of $1.5 billion or 16.7%, and 9.9% excluding currency and acquisitions, surpassing our constant currency target for operating income growth of 6% to 8%. Income growth was attributable to stronger volume and a significantly better mix in than previous years, a $1.2 billion pricing contribution, and productivity initiatives. In addition, OCI was lifted by favorable currency of $481 million for the full-year.

Adjusted EPS declined by $0.01 or 1.4% in the fourth quarter. But we're up a strong 12.5%, excluding the adverse currency impact incurred during the quarter. For the full-year, adjusted earnings per share of $3.32 were up $0.52, or 18.6%, and excluding currency, rose by 13.2%.

Discretionary, or free cash flow, defined as operating cash flow less capital expenditures, reached $6.8 billion in 2008, an increase of $2.4 billion, or 52.7% compared to 2007. Despite higher capital expenditures, related in particular to the establishment of new factories in Indonesia and Greece. This very strong cash flow performance was attributable to our strong net income growth, the optimization of our supply chain, and the lower use of cash to fund working capital, reflecting a partial resolution of forestalling issues. We expect that our cash flow in 2009 will benefit from our continued focus on all elements of our working capital, and thus should exceed our net income performance.

Our balance sheet remains solid. Our year-end net debt to EBITDA ratio stood at 0.94 to 1. In our debut year, we successfully accessed the capital markets and issued $10.1 billion of bonds at various well-laddered maturities and currencies for an attractive aggregate interest cost of 5.8%. Our continued and interrupted ability to tap the commercial paper market at particularly favorable rates underscores our recognized credit worthiness.

Our resolve to reward shareholders has remained steadfast despite the financial market turbulence. We raised our dividend by 17.4% in August to an annualized rate of $2.16 per share, in line with our target payout ratio of 65%. Our share repurchases totaled $5.4 billion, ahead of our timetable for our two-year $13 billion program ending April 2010.

One of the key benefits that we expected from the spin-off of PMI was faster decision making and speed to market, the fostering of a greater entrepreneurial spirit, more effective execution, and a focus on innovation. Marlboro's performance is testament to our progress in these areas. In deed, Marlboro achieved a 0.2% shipment volume growth in 2008, with gains of 2.8% in the EMEA region, 6.4% in Asia, and 4.1% in Latin America and Canada, more than offsetting a decline in the European Union region of 6%.

Marlboro's improving momentum is underscored by its volume growth of 2% in the fourth quarter. And we are confident that in spite of the current difficult economic climate, we will further strengthen and grow Marlboro going forward. Marlboro's brand architecture, supported by three key pillars, which we have described to you previously, is in full construction mode. Early signs in each affected market are exceedingly promising.

Let me provide you with a few examples of initiatives that are in place in numerous markets and that will gradually be rolled out geographically. Marlboro Filter Plus, or Flavor Plus, is now available in 20 markets. It has garnered significant consumer interest and enhanced Marlboro's vitality. It has been particularly successful in Romania where it has captured a 2.5% national share and a 4% share in Bucharest in December. In Moscow, it now has a 1.2% share and Almaty, Kazakhstan,a 1.5% share, and a 0.6% share in Kiev. In November, it was launched in Japan and has already captured a 0.3% share. Marlboro Intense, which is also named Compact, or Pocket Pack, is now available in the 11 markets. In December, it enjoyed a national share of 0.6% in Spain, and 0.5% in Italy, with stronger shares in key urban areas and an attractive demographic profile.

Several launches of the new Gold pillar have been executed to date. Gold Edge, Marlboro's first ever Slims offering is now available in Hungary, Poland, Russia, and Ukraine and has already got a 0.4% share in Warsaw. The new Marlboro Gold offer is currently being expanded nationally in Austria after a very promising test market in Vienna which witnessed a solid lift in market share. It has also been tested in France and Italy in four cities with encouraging results. The test market in France has been supplemented with an additional offering called Marlboro Gold Advance. Again, recording positive early signs.

The third pillar, which revolves around the concept of freshness, is also under construction in numerous Asian and Latin American market. Initiatives have been launched to date in 19 markets with solid results. These have propelled a 32% increase in Marlboro Menthol and fresh volumes in Latin America. The most successful launch has been in Japan, where Marlboro Black Menthol holds a 1% share of market.

Numerous exciting plans are in place to continue to build upon Marlboro's architecture in 2009 and beyond. As we have often stated, our brand portfolio extends well beyond Marlboro, and each brand has a key role to play as evidenced by their strong performance in 2008. Indeed, Parliament and Virginia Slims performed very strongly last year with volume growth of 20% and 8.2%, respectively, driven by their unique product characteristics, premium priced position, innovation, and geographical expansion.

In the mid-price category, Chesterfield's 13.7% volume increase in 2008 more than offsets L&M's decline, which slowed in the fourth quarter as the new L&M Essence performed better in Romania and Ukraine, and L&M continued to be the fastest growing brand in Germany with a gain of 1.9 share points for the year.

Finally, in the low-priced category, our key brands, Bond Street, Next, and Red and White, collectively grew by 3.8% in 2008. Together with strong local brands, such as Diana in Italy and Delicados in Mexico, they provide a strong safety net in the event that consumers were to downtrade from mid to low-priced brands during the economic recession.

On the acquisition and business development front, 2008 was another exciting year. In October, we completed the acquisition of Rothmans, Inc. in Canada. I'm pleased to report that the integration is progressing rapidly and smoothly and we are delighted with this new member of the PMI family. We enhanced our presence in the growing fine-cut segment with the acquisition in June of Interval, the leading fine-cut brand in France. We are pleased to announce today the acquisition of the Peteroes brand, the leading fine-cut brand in Norway, with a 58% category share.

Yesterday, we announced our agreement with Swedish Match to establish an exclusive smokeless tobacco products joint venture which will cover all markets outside of Scandinavia and the USA. We believe that such products represent a reduced risk for adult smokers and are very excited about their potential over the longer term in a wide variety of geographies.

As discussed previously, we continue to pursue a number of business development initiatives, and I remain hopeful that some of these will materialize as the coming year unfolds. All in all, as I look in the rearview mirror, we had a strong year by any measure, and we entered 2009 with a reenergized organization, solid momentum, and exciting plans.

Let me now turn to our prospects for the coming year. Regretfully, currency will cast a dark shadow on our financial results should exchange rates remain at current levels. Since the end of the third quarter, we have witnessed an appreciation of the US dollar against the euro, and a steep depreciation in the value of many emerging market currencies, in particular the Russian rubel, the Turkish lira, the Indonesian rupiah, the Mexican peso, and the Ukrainian hryvnia.

We also witnessed huge volatility in exchange rates. For example, the dollar-euro exchange rate traded in a range of $1.23 to $1.47 in the fourth quarter alone, making currency forecasting quite hazardous. While we believe that economic fundamentals will pressure the US dollar over time, we establish our EPS guidance for the year based on current exchange rates. As a result, in spite of the strength of our underlying business, our current EPS guidance, including an adverse currency impact of $0.80 for the full-year, is in a range of $2.85 to $3.00, compared to our EPS of $3.32 in 2008.

Let me illustrate the extent to which currency movements within the last month have impacted this guidance. At the spot rates prevailing as recently as mid-December 2008, our EPS guidance would have been $0.40 higher. Excluding the impact of currency, we expect EPS growth to fall within a range of 10% to 14% in 2009, and we are confident that we will be able to achieve our volume and currency-neutral targets again this year, namely volume growth of 1% to 2%, net revenue growth of 4% to 6%, and operating income growth of 6% to 8%. Our confidence is based on our solid momentum and the strengths of our fundamentals.

We own seven of the top 15 international cigarette brands. Our superior brand portfolio is led by Marlboro, which remains the only true global cigarette brand. And it has demonstrated its growth potential following our renewed focus on innovation and the development of a new brand architecture.

We believe we have the greatest global reach and the best geographic balance in the industry between mature and emerging markets. The spin-off has enhanced our speed to market and our flexibility. Our ambitious productivity program is generating substantial cost savings, and we believe that the excise tax and regulatory environment is manageable with no immediate and potentially disruptive threats on the horizon. Furthermore, our business generates substantial cash flows, which, along with our very solid balance sheet, provides with us with excellent liquidity.

We remain committed to return significant amounts of cash to our shareholders during the year through dividends and share repurchases. We anticipate that our share repurchases in 2009 will essentially be in line with the dollar level we expended in 2008. We are very focused on the fundamentals of our business and intent on delivering industry leading growth. Therefore, while we will do everything we can to mitigate the impact of unfavorable currency, we will not implement any measures that could jeopardize our strong underlying business momentum and sacrifice our long-term growth for a short-term benefit. Thank you.

Hermann and I will now be happy to take your questions.

Thank you. (Operator Instructions) Your first question is from the line of David Adleman with Morgan Stanley.

Good afternoon, Louis and Hermann.

Good afternoon, David.

Louis, let me start with currency. I obviously, and other outsiders, try to forecast the adverse currency impact, or the currency impacts. Clearly I was fairly far off in '09. I'm just curious, is there something other than translation that is substantial that's having that magnitude of a negative impact? Were there hedging gains that aren't replicable? Are there transactionable in the businesses in '09, etcetera?

No, it's purely translation, David. I mean, I don't know what your models and other models are. My own sense is you have probably underestimated the hit - -the currency hit in terms of translation of the emerging markets. If I just take four principal emerging markets- - If I take Russia, Turkey, Mexico, and the Ukraine, those four markets alone account for some $0.60 of the $0.80 hit. And I would suspect that your models probably haven't factored in such a hit for those emerging markets.

Okay. Secondly, Louis, are you and the board prepared, at least temporarily, to allow the payout ratio to drift above the 65% target in the short-term?

Most definitely.

Okay. Good. Thirdly, is there any evidence to date, or any realistic risk that some of your global competitors that are based in a market whose currency has not appreciated to the extent of the dollar, like the British pound, have been or will be more willing to reinvest in the markets with price competition or greater levels of spending behind their own innovation?

I think you would to have ask them that question directly, David. The evidence would suggest, over the last couple months, and there's been quite a lot of price activity across the world, the evidence would suggest that nobody at this stage is trying to use a currency benefit to get some competitive advantage. The year is still early, but we haven't detected anything. My own sense is that just the way you haven't given us much benefit for currency benefit in 2008, investors are unlikely to give much currency benefit to our two key competitors who report in sterling. I think that investors tend to look at constant currency growth rates more and more, especially in these volatile times.

Louis, one last thing. It obviously doesn't make sense today to put the pedal to the floor in terms of raising real pricing in emerging markets, but do think there's a lesson to this point given how well the business has held up versus other consumer goods that just from a secular perspective, the industry is giving emerging market consumers too much value, and therefore there is an opportunity over time to substantially increase profitability in these markets?

Well, again, you -- that's potentially an oversimplification, David. One has to look at excise tax levels as well. But clearly, as I mentioned in my remarks, in most emerging markets, we're in pretty good situation in terms of absolute and relative price levels. And that would lead to you believe that there is significant pricing potential going forward. I would want to highlight, however, that we have used the pricing leader quite significantly, certainly in 2008, in a lot of these markets, and we will continue to do so, and our guidance does protect quite a lot of pricing across the world.

Okay. Thank you.

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

good afternoon, gentlemen.

Good afternoon, Adam.

Can I ask just a clarification that I hope I had right. You said that at the beginning of 2009 there was no change to the trading in your main markets, but then I think you said there have been some slowing of the up trading in Russia. Have I got what you said correctly?

You have said that correctly, yes that we have witnessed a slowdown in the up trading to premium. It used to be double-digit rates. It is now single-digit rates. But the up trading continues.

Excellent. Second question, if I may,have have you - - and I'm talking about in January '09, have you raised prices of any of your key brands in any markets apart from Spain -- any of your major mark apart from Spain and the UK?

We have - - if I take, quite a lot of pricing happened in November and December, Adam.

Okay.

So in a number of markets, we've increased prices. Russia, Ukraine is going up, Indonesia has gone up, Italy we just launched a price increase, with the administration, so that should happen within the next two or three weeks. There's been pricing in the Benelux. There's been pricing across the world. Mexico has been pricing. I could go on.

Excellent. Thank you. That's very useful, indeed. Thank you very much.

You are welcome.

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

Thanks. Good afternoon.

Good afternoon, Judy.

Louie, if we look at the Marlboro volume growth in the quarter, obviously this is the second quarter in a row that we saw volume grow for the brand. If you look out 2009, I'm just wondering how you think about the sustainability of that improvement. On one hand, I guess you could point to potentially some weakening of maybe the premium brands. On the other hand, the EU market has been under pressure from a Marlboro brand perspective. So, potentially there is some recovery we could expect. If you can just characterize how you feel about the Marlboro's outlook for the rest of 2009.

Yes. Well, I think as I said in my remarks, Judy, if you take the EU and Japan, the market declines in those two territories were above trend in 2008, and we feel in that 2009 we won't suffer such market erosion. So that's already a positive.

With regard to Marlboro itself, this new architecture that is basically taking place is still very much in its early phase, and we have a number of ambitious plans for Marlboro, and clearly our plans call for continued growth of Marlboro, both in share and volume. So what you saw in the third quarter and the fourth quarter, we anticipate that that, hopefully, will continue as 2009 unfolds. In fact, if I look at our momentum, both in terms of OECD and non-OECD markets, the momentum is actually accelerating, so that's a good sign. And we have a number of exciting initiatives this coming year, and we're very hopeful that that will translate into better results.

Okay. And part of the acceleration that you are seeing in your underlying business momentum I presume is part driven by the step-up in the investment that you've made throughout 200. And I'm just wondering how you now feel about the level of the brand support at this point and whether we could start to see more positive operating leverage and some more of the cost savings now flowing to the bottom line rather than that getting reinvested back into the marketplace, given that the volume momentum that you are seeing?

Listen, we continue to invest judiciously behind the brand, Judy. Our productivity initiatives, we called back in March for productivity of $1.5 billion, averaging about $500 million a year. We achieved in that 2008. We believe we will achieve that in 2009. We also, I think, alerted for some time the investment community to increases in leaf costs. That will be around $350 million next year, in terms of leaf costs, which is part of our guidance. I would say that we are in competitive levels, but given the actions we have for Marlboro in a number of markets, we will continue to invest behind the brand.

And can you quantify how much of the productivity savings you got in 2008 versus the three year target?

We were smack on the number of 500.

Okay. And then finally, just in terms of how you are thinking about the share buyback commitment, the two-year $13 billion you have in place, and I know you have committed to the dividend rate being higher than the 65% target rain. I'm just wondering if you have the same level of commitment to completing that buyback program.

Absolutely. We have a steadfast commitment, both in terms of the dividends and share repurchases. Listen, we have the benefit of generating significant cash flow. As I mentioned in 2008, our cash flow was up close to 53%. We think our cash flow performance in the coming year will be better than that of our net income performance. We have still a very strong balance sheet, and we believe that, as I mentioned in my remarks, our share repurchases will be essentially in line with the ones we did in 2008. In 2008 we expended $5.4 billion. That was some 25% or $1.1 billion ahead of schedule. So we have the luxury in 2009.

And let us never forget that by buying back these shares, we're also saving the dividend, and that should give some comfort to those who are somewhat worried. I don't know why, but I am told that some are worried about the dividend. I think if you looked at the history of PMI's parent, if I can call it that, and PMI, we have always ascribed huge importance to the dividend, and the 65% target payout ratio was a target, and if that slips above in any given year, so be it. We recognize the importance of the dividends, and we have the benefit of a very strong and predictable cash flow, which gives us confidence in our dividend and share repurchase programs.

Okay. Thank you.

Thank you, Judy.

Your next question is from the line of Jonathan Fell with Deutsche Bank.

Hi there. I have to say, actually in David's camp as well as far as getting the FX impact wrong, just wondering if you could give us a bit more help for the model. I mean, it looks like you are talking about an overall FX impact if we take the mid range of your underlying growth estimate and the actual guidance. Looks like FX impact is negative 20%. Can you give us - - is it going to be a similar negative 20% at both revenue and EBIT? And would I be right in thinking that in the EU and Asia that the impact is going to be quite a long way under the 20% and would be higher in the region?

Yes, that would be a fair characterization, Jonathan. As I say, we're being dramatically hurt by principally the four markets I mentioned, which were Russia, Mexico, Turkey, and the Ukraine. There are others. The Kazakhstan [Tanguay] was devalued by 20% just today. That's a $35 million net income hit.

So there are a lot of other currencies that one has to build into the model, but I would say that the four key ones are the ones I mentioned, and they are $0.60 out of the $0.80, those four. I mean, the rubel alone, in the last month, has affected our guidance by $0.20. So 25% of our currency hit happened in one currency, in one month.

I guess on the EU, looks like we saw a little bit of a deterioration there in underlying shipments and profitability trends in the fourth quarter. Is there anything there which concerns you or is that something that would you expect to see disappear fairly rapidly in 2009 and merge into normal?

No, I'm not overly concerned. In fact, quite to the contrary. I think we tried, to the best of our ability, to point out that distortions in the EU that were caused by events in both the Czech Republic and Poland. If you eliminate those, as our earnings release points out, the trends are actually okay, and, in fact, if I look at market shares, in most instances, the trend is actually pretty good, and we're looking towards a much better year next year, because we'll have the distortions of the Czech and Poland behind us.

Germany is doing well. I think with the pricing in a few places we've narrowed the gap with Marlboro, so we'll see what happens there. And I would say that EU looks today better than it certainly did at the beginning of last year. Let's forget also, as I mentioned, in an answer to a previous question that the total markets we don't see eroding the way they did in 2008, either. Because most of the public smoking restrictions that affected industry shipments and consumption are behind us.

Okay. Thanks very much.

Thank you, Jonathan.

Your next question is from the line of Christine Farkas with Banc of America.

Thank you very my and good afternoon Louis and Hermann. Keeping with volumes, could you quantify the trade inventory boost in Bulgaria in the quarter?

It wasn't major. It was essential 500 million units.

Okay. Great. And then just broadly speaking of excise taxes, I guess around the world, would you expect these generally to accelerate over '08 next year?

Well, you would think that because of the economic crisis, governments would want more revenues and excise tax revenues from tobacco. So far, we, frankly, haven't seen any dramatic increases. In fact, in a number of places, legislators have voted down increases because of the economic crisis, so it's working both ways, in a way. Where we have seen increases, they haven't been dramatic. Indonesia is one example where there has been a tax increase. It's roughly up 7%, which is in line with what we've seen in the past. But very importantly, the structure of the tax and the eventual gradual harmonization of the tiers continues. So that's good news.

In the Philippines they've called for a tax increase to try to buttress the budget deficit as being discussed in parliament now but there are a lot of voice calling for no tax increase. Japan was probably the best example. I know a lot of investors were very concerned about a tax increase in Japan. Whilst it's not over and we'll know at the end of March, but the tax committee has recommended no tax increase on cigarettes in Japan, and that committee's recommendation has never, historically, been changed.

Okay, that's helpful. Moving to your brand spending, you called out about $100 million in brand spending,and it looks almost like a one time. And I know this question was asked is this something that is stepped up now into your base, or do you think that this is specific initiatives around specific initiatives in the year and, of course, we'll lap this in a year's time.

Well, there were clearly specific initiatives linked to some of our brand launches, but also, I think, there was - -part of it, particularly in Japan, was to make us or render us more competitive. I think we've mentioned that in previous calls there's been a dramatic shift in the market in Japan from vending to convenience stores. Convenience stores in 2007 used to represent 40% of consumption. In 2008, it was 60%. So they've taken on a huge importance, and the competitive battlefield has moved to the convenience store. So we need to be equipped, be able to compete in these key outlets.

Okay, great. Now, finally, on news, given your arrangement on Swedish Match, my question to you is where are the key market that you see as appealing in the near to intermediate terms and should we view this as perhaps seeing some signal that the EU may lift the band?

Well, we are hopeful that the EU will lift the band, and we will do everything, together with Swedish Match to ensure that that ban is lifted. There are very strong argue to lift it, and if you go back to the origins of the ban, it was essentially a protectionist measure by what were the Mediterranean monopolies at the time. It had nothing to do with health, it was just pure protectionism.

I would be wary to give you specific markets at this stage as to where we will focus our attention. As things develop, you will you be the first to be informed of where we're going to launch and how, for obvious competitive reasons. But there are a number of markets where we can launch news today that we will explore and study very carefully.

Thanks so much, Louis.

Thank you very much, Christine.

Your next question is from the line of Erik Bloomquist with J.P. Morgan.

Hi. Good morning.

Good afternoon, Erik.

Just wanted to drill into a couple markets, then. With respect to Germany, could you update us on where things stand with respect to potential increase in the stick count?

Yes, we understand that there is quite a lot of movement on that subject within the German administration and we're cautiously optimistic that decision will be announced in the not too distant future. So that is excellent news.

Okay, super. Then are there discussions or - - so you can't comment directly, but what is the - - it seems to me - - seems to us that the French pricing environment is one in which would make sense to further move price points above current levels. Are there discussions with the French administration on improving the revenues for the French government?

Regretfully, no, not at the time being. And I regret to say this, but unfortunately, in the last quarter of last year, one of our competitors publicly went out and said that the government was considering a price increase to generate higher revenues. At a moment where the economic crisis was unfolding. The government actually denied that, asked to us deny it, which we did, and regretfully, we're stuck in limbo at the moment. Having said that, our hope is that as the months unfold and tempers calm, we will be able to seek a price increase in France.

Great. Then with respect to Indonesia, I understand there's been a fatwa issued to recommend no public place smoking for Muslim men. Do you - - is that something that we should take seriously in terms of having an impact on volumes or consumption within Indonesia, or is it more likely to be followed in the breach, in your view?

I wouldn't worry about it too much. I think there have been mixed reports. This is not a new issue. All the Muslim teachings on smoking have been that it is discouraged, but it is not what's called haram, i.e. not allowed. In Indonesia, it came out at the same time as banning yoga. So I don't think it is being necessarily followed very seriously and we haven't seen any impact at all.

Great. Last question was just on the agreement with Swedish Match and what it means in terms of your harm reduction strategy going forward. Does this signal a precedence for smokeless tobacco in terms of the harm reduction product in that focus on reduced harm or reduced risk cigarettes is something that will follow only once tobacco control people accept the validity of the smokeless claims?

No, I don't think that should give you any sign of us slowing down on our other plans. This is all in parallel. It's a basic strategy of harm reduction, and the product elements of it include smokeless but also include cigarettes which will hopefully eliminate a lot of the harmful compounds.

Great. Thank you very much.

So we're working on both tracks and, in fact, spending quite a lot of resources on both tracks. So it's not one or the other, it's both at the same time.

Okay. Sorry. To follow up on that then, if you are continuing to spend in parallel, is that then a large chunk of that increase in marketing and research spend that we saw this year, the approximate $1 billion increases? Is that R&D work on reduced risk cigarettes a component of that?

Yes.

Very good. Thank you.

Your next question is from the line of Thilo Wrede with Credit Suisse.

Good afternoon, gentlemen.

Good afternoon.

Quick follow-up on your comments about the volume outlook in the EU. I understand that volumes are down pretty much on the trend lines on an adjusted basis. At the same time, though, other tobacco programs seem to be growing, rather than declining. Is that an indication that maybe there's more down trading going on in the EU right now?

I don't think we've witnessed an acceleration in the down trading in the EU, and I suppose Marlboro's performance is testament to that. Because as the year unfolded, its performance got better. So, I would not say that there's been an acceleration in down trading at all in the European union.

Okay. Then you mentioned brands like Next or Red & White, basically a safety net in case there would be down trading. Can you give us an idea what the average price gap would be between Marlboro and these brands?

Varies by market quite dramatically so it would be very dangerous for me to give you numbers. I mean, in France, it's 10%. In Russia, it's like 3% to 1%. Those are the two extremes. The rest is in between.

Okay. Then you had some very interesting product introductions in 2008. Should we expect to see similar range of new product introductions, be it filters, be it packaging, be it flavors like black menthol, as we saw in 2008, for that to continue in 2009?

Yes, I think as I mentioned in my remarks we have a number of exciting plans for 2009. A lot of it is geographic expansion of some of the products you already see in certain markets. And others are new products. We're very happy with our pipeline of new products, and we're going to deploy them across the world, in a diligent and deliberate manner.

There are no slow-down in spending on innovation despite the head wind from currency?

No. I think it's very important that we maintain our momentum, and yes, currency is a dark cloud. Currency, in my opinion, is always a relatively short-term issue, and my experience has been in times of difficulty, that is when you need to invest and push for growth, and we're in here for the long-term. I'm very confident with the product portfolio we have, with the infrastructure we have. We can gain share.

All right, thanks a lot.

Thank you very much.

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

Hi. Good afternoon, Louie and Hermann.

Hi, Chris.

I just had a few follow-up questions for you if I could. First, in relation to the checkmark in the distortions from that really occurred all throughout 2008, if I recall. Do we lap those in the first quarter?

Yes.

Okay. And then in terms of your expectations for 2009, would you have built in, if you can just talk to in this general terms, if anything, some mix degradation in your business on a concern that trade down could occur? Are you looking out - - can you talk about net detail, I should say, for '09?

We've clearly taken into account of the fact that the up trading has slowed down. That's something we clearly build into our numbers. And beyond that I'm not sure I want to tell you much more.

Understood, understood. And then if I could ask, relative to your mid-tier performance, looked like it was pretty solid in 2009. I know this can vary by market, but in terms of profits from mid-tier products versus profits from Marlboro, are those vastly different, or does it vary a lot by market?

It varies dramatically by market.

Okay.

It really does. But, no, we were very pleased with the performance of our medium-priced brands. If you take L&M, and not many people know this L&M is the number two brand in the European Union region after Marlboro. It had strong growth in Germany, in Benelux, in France, as well as Poland, where it's the number one brand. Chesterfield also grew very strongly across the world but particularly in the EU it grew very strongly in Italy and Spain, and Portugal and in Switzerland. So there's quite a lot of growth coming from this mid-priced segment and it's a lucrative segment.

And then the last question I had for you is just in relation to consumption, and I'm particularly keen on some of the emerging markets, have you seen overall consumption of cigarettes slow, putting aside up trading and that kind of thing for now?

No, we haven't really seen a shift. In fact, as I mentioned earlier, particularly because of Japan and the EU, we are projecting a better market environment than what we had in 2008.

Okay.

But we haven't detected any reduction in consumption. We just got the January numbers. And they're smack on our plan.

Okay, great. I appreciate that insight. Thank you.

I should add that probably the one area, which is not major, but the one area we have seen some softness is duty-free. But clearly we have seen a reduction in travel in a number of places, and particularly in Asia, and we have detected some softness in the numbers on duty-free, but that's really, so far, the only thing that seems to have been hurt by the current economic climate.

Okay, great, thank you.

Thank you.

Your next question is from the line of John Leinster from UBS.

Hi, gentlemen. Few questions for you. First of all, going back to the currency translation, clearly quite a lot of the raw materials are dollar or hard currency denominated, so are you building in a margin impact on this devaluations we've seen in Turkey and Russia and elsewhere?

Yes, it goes all the way to the bottom line.

Right. Okay.

There are offsetting benefits for local currency costs. That's in the guidance.

Yes. But effectively, you are assuming quite significantly lower margins for those operations because of the currency impact.

Absolutely.

Right. And secondly, - -in terms of the debt geographically, I don't know what the debt has been swapped into. Is there an obvious geographic profile of the debt?

No, because we we have done quite a lot of euro and Swiss franc. The bulk has still been in dollars. I think going forward you will probably see more euros. Some of these other currencies, the interest rates are prohibitive so it doesn't really make much sense to do. So.

Right. And also, in terms of the one big obvious transactional thing going back to currencies is exports into Japan. That's hedged so there's no real benefit in '09 but going forward, if the end stays where it is, is that big benefit potentially or not?

That is the one currency that is offsetting the big negatives, and, yes, we have locked in that favorability as has been our case traditionally. But if I take the yen '09 at current rates versus '08, that is an offsetting benefit to the $0.80 hit.

Lastly, no mention of the Chinese joint venture. That progression Well, or --

Yes, it continues to progress well. All the brands that we mentioned, RGD, Dubliss, and Harmony, are performing as expected, now in six market. Harmony was the first premium brand which was launched in Argentina, I think, in mid-November in limited distribution, and it's performing up to expectations. And we have a number of plans to roll out those brands in other markets as the year unfolds.

Importantly, Marlboro is doing quite well in China. And as we've said this is a slow progress, but so far all the signs are green and things are moving. So we're pleased with our cooperation with the CNTC, and I believe they are pleased with our cooperation.

Thanks very much.

Thank you.

Your next question is from the line of David Hayes with Nomura.

Good evening gentlemen. Just came back to the guidance on $2.85 to $3.00. Just in terms, you obviously had a fix FX assumption in that. You told us the operating profit would be up organically 6 to 8. Potentially that's quite a large guidance range that you have given. Is there some kind of volatility risk in the tax level or the interest cost that we should be aware of that drives that range? Is there anything else we should be factoring in in our numbers? Then second question is like [Amber]. That was the first question.

No, tax will be slightly high than it was in '08, I think it's like a $0.02 hit. There's no other real volatility - - we have usually given guidance of a $0.10 range. We felt that prudence would dictate, given the world's situation today, a $0.15 range was something that was more prudent. As we said in our earnings release, we think we'll be at the upper end of our long-term guidance. Our long-term guidance is 10 to 12 - - there's guidance on a constant currency basis is 10 to 14 and that gives you a sense that we're at the upper end of our long-term guidance.

Great.

I don't know if that addresses your question.

Yes, I guess. I mean - - the fact that you are saying if you do 6 at the operating profit level, you at the 285 range, if you do at the higher end, 8 or a little bit more, you are at the 3, (inaudible) is that right?

Yes, that's right. And hopefully with a bit more than 8.

Sure. Thank you. And then just another quick question, other companies talked about distributors, retailers having to destock levels because they are not apt to get financing. Obviously some of these markets are direct. but have you seen the fourth quarter quarter or at all anything happening there? Is that part of the volume decline that you have seen? Do you think that moves out into next year or is that not impacting your business at all?

No, clearly we watched that, and we watch our receivables and exposure like hawks. We haven't detected any real movement. I would say that the only place we've detected some movement is in Japan, where the shift that I mentioned from vending to convenience stores has caused a return of quite a lot of product that was destined for vending. So that affected volumes in the fourth quarter, I think across the whole industry. And those returns were higher than anticipated.

This card that's used for the vending, I think it it's now up - - it's only around 32% of smokers have that card which gives you a sense that it hasn't been a roaring success and therefore that explains the returns of product in the fourth quarter.

Other than Japan, we haven't seen anything, and frankly, I'm not surprised by it. Cigarettes are a fast moving consumer good. The margins for the retailers are excellent, and their bread and butter product for a lot of them. So they tend to invest in that category because it's both profitable, generates cash, and moves rapidly.

Sure. Thank you very much.

Thank you.

And your final question is from the line of Ann Gurkin with Davenport.

Good afternoon.

Hi, Ann.

As you focus the business on faster decision making and more local market management, are you finding more opportunities to save money, and if so, are those potential savings are in that $500 million or so number targeted this year?

Yes, we continue to look at ways of getting more effective. We haven't really detected any huge things but it's continual - - a continual priority for us to become more effective and more efficient, and I think, over time, we will do so. But that doesn't impact the $500 million. If we can find more, we will. As I said in my remarks, we will do everything to mitigate this huge currency hit obviously through pricing and cost, but not to jeopardize the long-term growth and momentum that we have. I think that's in the best interest of our shareholders.

Great. Then secondly, if I may just follow up on, Louis, I think you said leaf costs are going to be up $315 million this year. Is that 425 number that you gave out in March of '08 still the right number or has that number gone up?

No, it's gone up. I think, Hermann, certainly in the third quarter, and possibly even in the second, has alerted investors to leaf cost increases, and therefore that 400 was probably going to increase by 100 to 200. And that 300 is part of that. The good news is, our sense is that as commodity prices have declined, there is more interest now in tobacco, and the supply demand situation appears to be becoming much more balanced. So I would hope that we would have the benefits 2010 and 2011.

Then with respect to paper, do you anticipate adopting the ILP paper standard perhaps in the EU market or Australia in the next 12 to 18 months? I'm not sure I understand your question. The low emission propensity paper. Do you all anticipating using that on your product in the next - -

Sorry, yes, yes. Eventually I think there will be regulatory calls for more and more of these lower emission propensity cigarettes, and we are ready to do that when necessary.

That potential could be in the next 18 months or so, do you think?

In the number of markets, Yes.

That's great. Thank you.

Thank you very much Ann.

This concludes the Q-and-A portion of our conference call. I will now turn the call back over to Mr. Rolli for any closing remarks.

Okay. Well, thank you very much for joining us today. That concludes our conference call. I just wanted to announce that Philip Morris International will be presenting at the Consumer Analyst Group of New York Conference on Tuesday, February 17th at 3:00 p.m. eastern time, and we will be webcasting that presentation. So please check our website for more information. Thank you and have a good day.

Thank you very much, everybody.

Thank you for participating in today's Philip Morris International's 2008 fourth quarter and full-year earnings conference call. You may now disconnect.