菲利普莫里斯國際 (PM) 2009 Q1 法說會逐字稿

Good day welcome to the Philip Morris International first-quarter 2009 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 invited to ask questions at the conclusion of questions from the investment community.

I will now turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications, please go ahead sir.

Welcome.

Thank you for joining us.

Earlier today we issued a news release containing detailed information on our 2009 first quarter 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 first quarter of 2009 and comparing them with the same period in 2008 unless specified otherwise.

References to volumes or for PMI's shipments, industry volume and share data is sourced from AC Nielsen, other third party sources and internal estimates.

Net revenue data exclude excise taxes.

You will find data tables showing how we made adjustments to revenues and operating company's income, or OCI, for currency and acquisitions at the end of today's webcast slides which will be also posted to our website.

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

And now it's my pleasure to introduce Hermann Waldemer, Chief Financial Officer.

Hermann.

Hello, everyone.

I'm pleased to report PMI's strong business momentum continued into 2009 in spite of the difficult economic environment.

Net revenues in the first quarter grew by 3.9% excluding acquisitions and currency driven by price increases across a broad range of markets.

OCI increased by 6.2% excluding acquisitions and currency.

This was driven by strong performances in the Eastern Europe, Middle East and Africa or EMA.

In Asia regions where net of currency we achieved double digit OCI growth in key markets of Russia, Ukraine, Australia, Indonesia and Korea.

A 2.3% decrease in the [EU] region OCI net of acquisitions and currency resulted from a sharp contraction in industry volume in Poland due to large tax driven price increases, low shipment volume and a less favorable mix in Germany, some minor market share erosion across the region and higher marketing investments behind our new Marlboro initiatives.

Reported diluted earnings per share, or EPS, declined by $0.05 or 6.3% in the first quarter to $0.74, but were up $0.10 or 12.7% excluding the adverse currency impact.

Before I go into further details, let me focus on the three topics which appear to be top of mind amongst our investors and the analysts who follow us.

These are consumer trends in emerging markets, pricing and currency.

I can say today that we have not seen any broad based trends towards consumer down trading on a global basis.

Let me illustrate the situation and how it varies from country to country with four examples: Russia, Ukraine, Indonesia and Argentina.

In Russia, we are seeing signs of consumer down trading driven by the impact of the collapse in oil and metal prices on the Russian economy, and the substantial cigarette price increases that have taken place over the last 12 months.

While shipments of super premium Parliament continue to increase in the first quarter, the volume of premium Marlboro and mid-price Chesterfield were below last year's level and sales of low price Bond Street increased significantly.

Overall, PMI shipments in Russia were in line with last year.

Our first quarter market share was up over 3 points to 25.1% as measured by AC Neilsen.

It should be noted that we have now switched to this service provider in Russia due to its more extensive market coverage.

We have achieved double digit OCI growth in local currency through pricing and this has partially mitigated the negative currency impact on profitability in US dollars.

The impact of the global economy crisis on Ukraine has been worse than on Russia and this has been compounded by political uncertainty.

Nevertheless, our shipment volume in the first quarter rose by 0.7% and our market share for the period increased by 1.1 points to 35.8% driven by Parliament and Chesterfield.

In an effort to boost revenues Ukrainian government has brought forward to this May excise tax increases planned over the next two years.

This is expected to result in large retail price increases, which in turn could lead to consumer down trading.

However, we believe that we will be able to maintain our leading position should any turmoil occur thanks to our excellent momentum and broad brand portfolio.

There has been no consumer down trading in Indonesia, but our volume in the first quarter increased by 2.8% broadly in line with the evolution in the total market.

Consumer sentiment in Indonesia has been positively impacted by a reduction in inflation following significant price increases last year for cooking oil, gasoline and rice and unemployment levels have remained stable.

The Indonesian economy has weathered the economic storm much better than most countries in Asia helped by its lower dependence on exports.

The fastest growing segment in the Indonesian market is machine made lighter tasting kreteks.

This has helped us to grow the volume of A Mild by 12.5% in the quarter while our hand rolled Dji Sam Soe and Sampoerna HR Brands have been negatively impacted by a difficult transition to higher per stick price points.

In addition to a continued strong volume performance, we have been able to boost profitability in Indonesia by pricing both A Mild and Marlboro ahead of inflation.

The fourth country I would like to talk about is Argentina where uptrading in the cigarette market has continued.

This is a country that has been frequently mentioned by economic commentators as being particularly vulnerable.

This pessimism is not reflected in the performance of the cigarette market so far this year.

During the first quarter consumers continued to trade up from the low and super low price segments to the mid-price Philip Morris brand and premium Marlboro.

PMI's volume was up 1.2% and our three month moving average market share through the end of January reached 72.2%, up 2.7 share points.

In addition, we were able to implement price increases in order to improve our profitability.

The outlook for the balance of the year remains positive.

The introduction of a minimum excise tax in February should help minimize tax driven down trading to lower price brands over the longer term.

As these four examples show, we are not witnessing a global consumer down trading trend and the situation is quite different market by market.

Some people have questioned our ability to continue to increase prices in the current economic environment.

Our track record over the last six months shows that on the contrary we have retained our ability to increase prices in order to boost our profitability.

As shown on this slide, we have increased prices across a broad range of markets including Greece, Italy and Spain in the EU, Romania, Russia and Turkey in EMA, Australia, Indonesia and the Philippines in Asia, and Argentina, Canada and Mexico in the Latin America and Canada region.

Also you may have seen press reports that we have announced to the trade our intention to increase prices by [EUR0.20] across our portfolio in Germany in June.

Our pricing variance in the first quarter was $358 million.

This is the largest pricing variance that we have ever achieved in a quarter.

This highlights our ability to successfully implement price increases during a recession.

In fact, our pricing variance this quarter was larger than our total annual pricing variance just three years ago in 2006.

We trust that our presentation at CAGNY provided investors and analysts with a better understanding of how currency impacts our business.

As anticipated, our first quarter results were severely impacted by the strength of the US dollar.

Indeed, currency adversely impacted net revenues, OCI and EPS by some $700 million, $400 million and $0.15 respectively.

As you're all aware in recent weeks we have witnessed a slightly more favorable currency environment.

In fact, should current spot rates prevail for the rest of the year we would anticipate that our EPS would climb to the high end of our February guidance.

While unit volume may be somewhat softer than our earlier expectations we are confident that this shortfall, should it occur, will be more than offset by the benefit of pricing.

All in all, given continued currency volatility we believe that it would be imprudent to raise our guidance at this early stage of the year.

However our solid start to the year certainly affirms our confidence in achieving our 2009 constant currency EPS targeted growth of 10% to 14%.

Let me now comment on our first quarter results in a little more detail.

Our cigarette shipment volume was stable at 203 billion units, but was 1.1% lower excluding acquisitions.

However, on a per selling day basis volume excluding acquisitions was stable in spite of significant price increases.

This represents a solid achievement in light of our strong results in the first quarter of 2008.

Our shipment volume in the EU was down 3.7% driven primarily by the aforementioned contraction of industry volume in Poland and a slight market share erosion in Italy that was compounded by trade inventory distortions.

At 38.4% our estimated market share in the EU region was down 0.3 points due mainly to the shedding of low price, low margin volume in Poland, as well as the impact of a slight decline in the premium segment in Italy.

It is important to underline that our market shares in France, Germany and Spain have stabilized.

In the EMA region volume was down 0.3%, but up 0.8% on a per selling day basis.

This region includes our worldwide duty free business which was down 10.5% due to the expected impact of reduced travel.

PMI volumes and market shares were strong notably in Nigeria, Egypt and Turkey and we also gained market share in Bulgaria, Croatia, Romania, Russia and Ukraine.

A very strong share performance in Korea, continued volume growth in Indonesia and the favorable distribution inventory movement in Japan related to the resourcing of production from the USA to Europe last year drove a 2.2% shipment volume increase in the Asia region.

We have stabilized our market share in Japan at 23.9%, thanks to the strong performance of Marlboro Black Menthol and Marlboro Filter Plus and have just launched Lark Classic Milds nationally and Lark Mint Splash in test market.

In Korea PMI gained 2.8 share points and achieved a record share of 13.8% in the first quarter thanks to Marlboro, Parliament and Virginia Slims.

In the Latin America and Canada region reported volume was up 4.4% boosted by our acquisition of Rothmans Inc.

in Canada.

Excluding acquisitions, shipments were down 4.7%, due to targeted inventory reductions and weaker consumer demand in Colombia, the impact of December price increases on industry volume in the first quarter in Mexico.

Our share of the Mexican market increased by 2.3 share points to 69.2% behind the strong performance of Benson & Hedges and Delicados.

Marlboro Fresh contributed 0.5 share points to the 48.3 share of the Marlboro family.

On a brand basis, super premium Parliament was a top performer with growth of 5.9% in spite of the weakness of the duty free business and the continued market decline in Japan.

Volumes grew strongly in Korea, Russia, Turkey and the Ukraine.

After a particularly strong performance in the fourth quarter of 2008 Marlboro shipment volume was down 2.4% to 71.1 billion units, driven by lower industry volume and an 0.4 share point erosion in the EU region, the already mentioned decline in duty free sales and a softening in the premium segment in Russia.

We are not particularly perturbed by Marlboro's performance this quarter.

As we continue to roll out our new brand architecture for Marlboro across many markets we indeed remain very optimistic about the future of the brand.

The new Marlboro Gold packaging has been introduced in Austria, France, Germany, Italy and Poland after very positive trial results.

The slimmer diameter Marlboro Gold Edge is performing ahead of expectations in Russia and Ukraine and we are just launching Marlboro Gold Advance, a 10 milligram product under the Gold umbrella nationally in France after excellent consumer feedback in test market.

Under the Marlboro Fresh umbrella Marlboro Black Menthol continues to drive the return to growth of the Marlboro franchise in Japan.

During the first quarter Marlboro achieved a share of 10.4% in Japan, 0.5 points ahead of the same period last year, with Marlboro Black Menthol contributing a 1% share and enabling us to stabilize our overall share in the growing menthol segment at 44.9%.

Given the success of Marlboro Black Menthol in Japan, it was launched during the first quarter in Hong Kong and Indonesia.

In the mid-price segment after achieving strong growth in 2008, Chesterfield volume remains resilient.

A strong performance in the EU where volume was up 5.5% thanks to Austria, France and Portugal, was partly offset by a decline in Russia.

L&M is globally showing a stronger performance than in 2008 with volume just down by 0.5% in the first quarter in spite of a continued double digit decline in Russia and weakness of the Polish and duty free market.

L&M remains the fastest growing brand in Germany and is the second largest cigarette brand in the EU region after Marlboro.

Our key low price international brands, Bond Street, Next and Red & White, achieved a combined volume of 15 billion units, up 1.5% over the first quarter of last year.

Overall during the first quarter PMI volume by price segment remained very stable with premium representing 49% of cigarette volume, mid price 29% and low price 22% in line with the previous year.

PMI's financial position remains very strong.

Free cash flow, defined as operating cash flow minus capital expenditures, was $1.3 billion, in line with last year as lower capital expenditures in the quarter offset the negative impact of currency on net earnings and working capital requirements remained firmly under control.

Our balance sheet and liquidity position remains very strong and we continue to benefit from strong fixed income investor confidence.

During the quarter we successfully issued additional bonds for a total of EUR2 billion and CHF0.5 billion Swiss Francs and now have a weighted average cost of long-term debt of 5.6%.

We continue to implement our strategy to return cash to our shareholders.

We have declared our willingness to surpass our target dividend payout ratio of 65% and we spent $1.3 billion to repurchase 36.7 million shares during the first quarter.

As we have said previously, we do not expect the tobacco industry to be immune from the impact of the global economic crisis, but to remain resilient.

This has been borne out during the first quarter.

We have seen some softening of consumer trends in Russia and Ukraine, but no global negative pattern.

We have continued volume growth for example in Indonesia and further trading up from the low and super low price segments in Argentina.

We have also seen some reductions in trade inventories in certain markets as our partners seek to optimize cash flows.

If unemployment continues to increase we may see a further softening of global consumer trends, but think that should this occur it is likely to be moderate in nature.

We believe we have the strongest overall brand portfolio and the best geographic balance in the industry between mature and emerging markets.

The efforts that we have made to refresh our innovation pipeline and to strengthen the Marlboro architecture are beginning to bear fruit.

As highlighted earlier, we have increased prices across a broad range of markets in order to partially mitigate the impact of unfavorable currency, as well as any future potential volume or mix softness and most recently have announced a price increase in Germany.

The excise tax and regulatory environment continues to appear manageable.

We are not aware of any potentially disruptive threats on the horizon in our key markets except as previously mentioned in Ukraine.

We continue to implement our productivity programs and are on track to deliver substantial cost savings.

In the short term we face some strong currency head winds, nevertheless our business continues to generate substantial cash flows which, along with our very solid balance sheet, provide us with excellent liquidity.

We remain committed to a generous dividend level and foresee share repurchase in 2009 at a level similar to those undertaken in 2008.

We remain focused on further strengthening our brands and our overall business and will therefore not take any measures that provide only a short-term gain.

We remain committed to our mid- to long-term currency neutral financial growth targets and strongly believe that we will be able to achieve them in 2009 in spite of the difficult economic environment.

I will now be happy to take your questions.

(Operator Instructions) Christine Farkas of Merrill Lynch.

Thank you very much.

Good morning, Hermann.

Morning, Christine.

I'm looking at the EU, I respect your comments about no global trade down, but look looking at Marlboro's share across France, Germany, Italy, and of course Poland, we did see some share erosion as well as some sequential slow down in some key markets.

Given the importance of the EU on your profits, can you talk a little bit about what you're seeing sequentially and, given the strong innovation portfolio behind Marlboro, why perhaps Marlboro isn't holding up better than what we saw in the quarter?

Well, first of all, I would say that if you look at the shares for the EU region then you clearly can see Marlboro is stabilizing.

Let's not forget that Marlboro over the past couple of years was under pressure by price repositionings of premium brands or mid-price brands that went to the low end.

That is behind us.

We still have some slight share erosion in Germany, it's still down 0.6, France is down in the quarter on quarter comparison, but flat actually if you compare it to Q4 of 2008.

Spain down 0.5, Poland down 0.04, so these are much lower rates than what you have seen, and actually when you go to the innovation pipeline, we are just at the very beginning of rolling that out.

You have the Marlboro relaunch repackaging of Marlboro Gold.

It's now in the markets in Germany, Austria, Poland, France, Italy, so this is just starting.

Marlboro Advanced 10 milligram product under the Gold umbrella, the rollout actually is only starting with France now later this month for the beginning of May.

So many of the initiatives that we have done have just started, there is much more to come.

And this is what gives me the confidence that this is going to strengthen the Marlboro franchise going forward.

When it comes to the total EU market, then you have to see that there was one really very special item in there, which was the trade or the retail inventory reduction in Spain, which was driven by working capital requirements of the tobacconists, these are all small entrepreneurs which have brought their stocks a little bit down, but not to the point where we would risk any out of stocks there.

So that had an impact on the market and therefore on the volumes this quarter.

Thanks for that, Hermann.

If I could follow up with just a couple of housekeeping items.

Could you quantify the cost savings achieved in the quarter?

We have delivered our $500 million actually last year.

We are fully on track to achieve $500 million again this year.

We have leaf cost increases in the quarter, that was $40 million, again that also something that reflect earlier.

So let me tell you I can fully reassure you that we will deliver the next $500 million in the year 2009.

Okay, great.

And finally just on the chatter around multinational tax changes or potential changes in the US tax regime, do you have any commentary about that and what your potential impact or alternative may be there?

Yes, I have.

I mean, the most important thing first of all is that any limitation of tax deferral would put US companies simply at a competitive disadvantage versus their international peers.

That is certainly not something that the US government wants.

I would say that actually probably what the US government has in mind that all of those points don't apply to PMI.

I mean, first, I think the government probably wants to [avoid] that foreign profits are parked abroad forever.

Our case is that three quarters of our earnings abroad are actually repatriated to the US every year in order to satisfy dividends and other US dollar requirements.

The second thing is that this is of course a fight against the abuse of tax havens.

We are not using or abusing any of those tax havens.

And the third one is probably that the government wants to avoid profit shifting via intercompany pricing abroad.

I can tell you that we have conservative intercompany pricing policies around the world, consistent policies, and actually we secure those policies wherever feasible with advance pricing agreements with respective fiscal authorities of those countries.

So in terms of looking forward we will see what will happen.

We did some if you like simulation.

What the Rangel proposal actually would mean to us, you know that this is the idea of combining some restrictions of deferral and restrictions on possible deductions with a rate reduction, but that impact would be less than 1% on our tax rate.

So we will see what's going to come, but you can see we are clearly not the target that the US government is having in mind.

Great, thanks for that, Hermann.

You're welcome.

David Adelman of Morgan Stanley.

Good morning, Hermann.

Morning, David.

First, Hermann, a question about market share.

I think it's fair to say that your overall share trends improved throughout 2008, particularly in the fourth quarter, and it appears not just in the EU but broadly that some of that momentum has moderated in the first quarter.

Do you think that's a fair observation and if it is true what's happening?

Is it a reflection of the economy, your premium price positioning, the price increases you have taken and so on?

Well, we have been talking about EU before, let's go to the other regions.

I do not agree with the statement, I mean, let's go one by one.

You go to the Asia region, there actually we have stabilized our share in Japan, a very important market at 23.9%.

We are growing tremendously in Korea, we are growing 2.3% in the Singapore to 48%.

The region share in terms of end market sales is also up 0.3% to 19.8%.

So that's not valid I would say for the Asia region.

If I then go over to the EMA region, then when you look at the Neilsen shares, well our shares both in Russia and in Ukraine and actually in Turkey, another important market, are up quite a bit.

So no, I don't see any general trends.

There are always specific market situation on a market per market basis.

Okay.

Secondly, Hermann, is elicit trade becoming any more of an issue with the weakening economies?

No, we don't see that.

I mean elicit trade I would say in general is rather triggered by large price differentials between neighboring countries.

No, we don't see an increase there.

It remains a problem, but it's not increasing, there's not much decreasing either.

I mean, our EU agreement there is very successful.

We have seen that the UK actually joined now the EU agreements just a couple days or a week ago.

Now all 25 member states are now part of that agreement.

Okay.

And then two last things, Hermann.

With respect to share repurchases, what's the argument given where the stock is valued, where it traded in the first quarter?

What's the argument against either accelerating the program, or just front-end loading it a bit, given the current stock price?

Look, I mean, it's again, it would be speculating, if you like, at the end of the day.

We have been pretty heavy in the market in the first quarter I would say, $1.3 billion is $1.3 billion, that's a sizable amount of money I would say.

We will continue to do what we did in principle and in general we will go on a steady pace.

Okay.

Then lastly, Hermann, in Brazil I know it's not a big profit center for you, but BAT led a price increase in that market I think a few weeks ago.

Have you followed them as of yet?

We are filing our price list today and that price list contains substantial price increases across the board of our portfolio.

That being said, it's a bit unfortunate that this heavy excise increase driven change was not accompanied by reform of the excise tax system, which in my opinion is overdue in Brazil.

Okay, thank you Hermann, I appreciate it.

John Leinster of UBS.

(inaudible) John Leinster, UBS.

Just a couple of things.

In Germany taking price increase for a first time for a number of years.

Given down trading continues and there still seems to be a problem with elicit trade, does that simply reflect perhaps you've accepted the sort of ongoing down trading within Germany or is that something that can still be stopped?

Well, look, I mean the German market is not an easy market, has never been an easy market.

But I mean, I think in terms of performance we have seen substantial improvement in Germany.

We have a great team there.

They have done a great job.

Our share performance for cigarettes is stable now at 35.8%.

So we have really stabilized Marlboro in that market, still slightly down.

The new Gold, new pack design is going out there.

At the same time we have established L&M at the low price which as you know is not that much of a difference in price than in other markets, just some $0.40.

We have established L&M there.

It is the fastest growing major brand in the market.

It is now at 7.6% share.

It's having a, (inaudible) [24] share of 15%.

So I think overall we are doing fine in the market, it's just that the market environment in that sense has changed at what you were used to say three, four, five years ago, that we were talking about the image contenders between Marlboro, Lucky Strike and Gauloises Blonde, and today we talk about those three together eventually versus at the low end the JPS, the Pall Malls, and most importantly our L&M.

Right.

On the Ukraine you mentioned the big tax increase coming through in May, are you therefore expecting -- I mean is the slight increase in volumes now and the trading up, is that just going to be, going to see a very large trade load in the second quarter, is that something that's illegal in the Ukraine?

No, it's not going to be much of a loading question there in the Ukraine.

I mean, the thing in the Ukraine simply is, and that's why we issued the word of caution there on that market is, that whilst overall prices are still nevertheless in the affordable area, nevertheless we have seen a series of excise driven price increases in a very short timeframe.

You had one in September of 2008, you had another one in January, and now you will have another one in May.

So kind of the speed of those price adaptations is what really -- what makes it difficult in an overall really difficult economic environment for that country, so that I think is the crucial point in the Ukraine.

All right.

In Canada just lastly, [include] the industry signed an agreement to try and get the Canadian government to crack down on the elicit trade there.

There seems to be a bit of a slow down in the decline of the market.

I mean is the enforcement agencies actually looking at the issue of cigarettes coming off the reservations or is that still an issue to be?

That is still an issue and we don't see much improvement there yet.

The one notable improvement I do see however is that the problem gets much more media attention and usually governments attention follows media attention, so that's a good development.

Because at a certain point in time this will need more enforcement and therefore more government intervention into that topic.

But we talk about 30% of consumption, which is coming out illegally out of these reservations.

Okay.

Well, thank you very much.

You're welcome.

Adam Spielman of Citigroup.

Hi.

Good morning.

A question on the balance if I may between pricing and share.

You said that, if I understand you right, you're extremely confident that your constant currency earnings guidance for the year will be met even if volumes are perhaps slightly weaker than expected.

And if necessary that you will increase pricing and clearly this year you already had a huge increase in pricing as you said on the pricing variance.

But at the same time I'm interested in how you square that with a market share loss in the EU and there beginning to be some signs of down trading in Russia which I guess is your most important emerging market.

And in the past I've always understood that you wanted to balance profit growth and share growth, I was wondering just in this rather difficult year whether there's a slight change in emphasis compared with where you may have been a few years ago.

Look, I mean I can only talk about past pricing here.

You see what we have done.

Look, I mean this is not a question that you answer for the world, this is not a question that you can answer for a region, this is clearly an answer on a market per market basis.

We try to find the right balance there, that's what we have done in the past.

That's what we do now.

That's what we want to do going forward.

It is a balance overall on a market per market basis.

And I guess I infer from that if in some markets you lose a bit of share, but you basically improve profit by taking pricing as you have done, then you're very comfortable with that.

We make conscious decisions on a market per market basis, yes.

Thank you very much.

Judy Hong of Goldman Sachs.

Thanks, hi, Hermann.

Hi Judy.

One question on Russia here, as you see signs of some down trading in that market can you talk about what's happening with price gaps between premium and low price?

And as down trading is happening do you sense any reluctance on the part of your competitors to follow price increases, or is this industry still pretty rational in terms of the pricing?

Look, I mean, in terms of price gaps in the Russian market, they have not increased substantially.

I mean, sometimes at the low end it's a little bit less in absolute terms in terms of our price increases than at the high end.

I mean, the gaps in Russia are wide in any case, so therefore I mean the question of down trading is not driven by price gaps.

In that market, I'm speaking Russia here, it is really rather the environment overall.

And then when you look there at our end market sales data and you see that actually Parliament which is super premium continues to grow, then Marlboro being premium, Chesterfield being at the high end of the mid-price, being somewhat declining, and then you see sharp increases at the low end of in our case with Bond Street being up 27% almost, then it's clear what's happening there and it's clear how the different segments of population are doing.

So this is very much driven by that.

Let me add there that actually Parliament in our case in Russia is a bigger brand than Marlboro.

And actually the margin we derive from Parliament in Russia are about 50% higher than the ones from Marlboro, if I may add that.

Okay.

And then in Latin America and Canada region, Hermann, you saw profit down about 9% if you take out currency, and there is actually pricing seem pretty favorable there, so I'm just wondering what happened just from a profitability perspective in that region.

Okay.

Of course minus 9%, I agree with you sounds terrible, but that actually means in absolute terms $14 million.

So of course I mean we have to put it into the context there.

This is actually driven really by trade inventory adjustments, Colombia as I mentioned, also a little bit in the Dominican Republic.

Then in terms of comparison to the year before you had an excise windfall profit in Ecuador which you don't have this year, so it's kind of unfavorable comparisons there and in terms of absolute money, we don't talk about big stuff.

I mean, let me put it this way, there is nothing fundamentally wrong in the business model, to the contrary.

We are doing well.

We had price increases as you said in both Mexico and Argentina.

We are growing share in our most important markets of Mexico, up 2.2% to 69.2%, Argentina 72.2%, I mentioned Brazil is also up.

And important, Canada is up also on share point pro forma if you compare it to really a year ago where we were not yet the 100% owner of the company.

So there's nothing fundamentally wrong in the Latin America region.

Okay.

And then finally on currency, Hermann, if I look at your first quarter it looks like currency was about a $0.15 of negative impact.

I think your guidance still implies about $0.80 hit for the full year.

And I know you've alluded to some favorability that we've seen more recently.

But if you sort of annualize the $0.15 you get $0.60, and then fourth quarter I'd imagine year-over-year comparisons are actually more favorable versus kind of the first three quarters of the year.

So it actually seems like there's even bigger currency upside than kind of the EPS coming in at the high end of your guidance at spot rates.

Am I not reading this correctly?

Well, look, we are doing here also kind of regularly our currency sensitivities of where we think we're going to come out.

And it's actually the volatility in there which is the key argument.

I mean we had this $0.80 of impact when we gave guidance at spot rates then beginning of February.

Then actually if you would rerun it, we did rerun the simulation at quarter close, i.e., at the end of March, the $0.80 would be $0.75.

Then if I would do it, we did do it again on Monday this week, then it was $0.70.

And if I do it yesterday it's $0.73.

You see the volatility up and down in there.

So given that volatility we simply see no basis to change our guidance based on currency at this point in time.

Let's talk again once we have three more months of actuals after the end of quarter two.

Okay.

Thank you.

You're welcome.

Thilo Wrede of Credit Suisse.

Hi, Hermann.

Hi, Thilo.

Do the four markets of Russia, Ukraine, Mexico and Turkey still account for about 75% of the negative currency impact this year?

Roughly, yes, yes, yes.

Okay.

And then you talked about Spain and the one-off inventory change you saw there due to working capital requirements for the wholesalers.

What gives you the confidence that this is only a one quarter phenomenon?

Why couldn't this drag out into second and third quarter as well?

And how much do the price increases in Spain have to do with the volume shift there?

I don't think it's the price increases.

It is really working capital at the retailer level, but I think that they are at least close to the levels that they really, really need.

I would imagine that quite a number of retailers, given the difficult situation the whole country is in, and they are in in terms of working capital, that they had a close look at their inventories again, what they really, really need, and that's what they have adjusted to.

I mean if I just give you a comparison, I mean you had the 10% down as I mentioned.

But if you take the last four-week moving average, then it's only down 3.1%.

So I think that has already calmed down and I think it was an adjustment and it should not repeat itself.

Okay.

Then the down trading that you're now seeing in Russia, you said it was driven by the state of the economy and commodity prices.

What has to happen for the down trading to turn as uptrading again?

Is it entirely the oil price and other commodity prices?

Well, the oil prices, the commodity prices, I mean they would have certainly an immediate and big impact on the currency rate of the ruble.

For the consumer, I think when it's all about consumer confidence to start with and I would say a leading indicator be it Russia or be it elsewhere is unemployment rates.

Steeply rising unemployment rates are always a warning signal and improving rates are a good signal, I think that's what I would look at.

Okay.

And then just one last question on Poland real quick.

How much is elicit trade driven by the tax amortization there in Poland, a problem that's contributing to the volume decline there?

Yes, okay.

It's right that of course now Polish prices are relatively high and therefore there is now in-flow into Poland whereas we were also used to in-flow from Poland into Germany.

So I mean the thing really is that the key to the situation in Poland is however not that.

It plays a role, you're right, it plays a role, but the key there is simply that driven by EU excession and therefore compliance with the EU excise requirements you had a series of really steep excise driven price increases in the market.

I mean, look today PLN8 or our Marlboro prices after the stock depletion we have already announced, almost PLN9 for a pack of Marlboro, that's quite a price.

And the whole portfolio in the market has become much more expensive than what it used to be.

Smoking incidents which used to be in the range of 40% or even slightly above in Poland is coming down to last measurement data we have about 33% in the market.

That's a steep decline, on the other hand this is a rather normal rate for a western European country.

So it's rather there than in cross Poland sales.

All right, thanks a lot, Hermann.

You're welcome.

Jon Fell of Deutsche Bank.

Hi, everybody, a couple things.

First of all, on Germany, how optimistic are you that the price increase you've announced for June is going to be something which generates a longer term price increase, or is it something that will just be in there for however many months it is before the number of sticks per pack goes up?

And then the second thing was just on this general situation of distributors and destocking, are there any other markets around the world where you think there might be vulnerabilities to that going on that we haven't seen yet that you're concerned about?

Okay.

I mean the first question on Germany, I'm not commenting on future pricing, but I fully enjoy the existing price increase that we have announced.

Then on the minimum pack content yes, that law is in the parliamentary process.

I see no reason why that piece of legislation should fail.

So the change to the new minimum pack content of 19 can eventually be in August.

In terms of stock reductions at trade levels, I mean, we have -- in the general trend we probably have seen that already.

I mean, Spain was of a magnitude that I do not see repeated elsewhere.

On the other hand, we together with our partners in the trade tried to manage pretty tightly those stocks.

So I can't exclude some adjustments in addition in other markets driven by the financial situation, but only by that.

But it would not lead to a situation where that would have impact on the competitive position, i.e., I cannot see a situation where that would trigger out of stocks where we have the necessary trade programs in place with our partners to make sure that there is always enough stock available.

Thank you.

Just lastly, sorry, on Japan, where you benefited I think a little bit in shipment terms because of this production move from the US to Europe, is that going to unwind in the next quarter or coming quarters, or is that a one-off adjustment we won't see again?

It is another one-off adjustment upwards driven by resourcing, but that adjustment has been made, there won't be more of that.

But it won't unwind.

No.

Okay.

Thanks a lot.

You're welcome.

Chris Growe of Stifel, Nicolaus.

Hi, good morning, Hermann.

Morning, Chris.

Hi, if I could just follow up on that question quickly on Japan.

You gave some information in the press release how excluding that one time adjustment I believe your shipments in Japan were still up 0.8%.

Is that correct?

I thought that's what I read.

(multiple speakers) down 5.5%, but I think you said your shipments were still up even excluding the inventory movement.

That's right.

Look, I mean, overall maybe a couple words there really on the situation in Japan.

I mean, the underlying market decline in that market, because the minus 5.5% down on the market is of course influenced also by selling days.

I think the underlying market decline is rather in the range of 4%.

We are really happy that we have stabilized our share performance in the market, that's very, very important, Marlboro is up, that was our priority in terms of market competitiveness.

We have achieved that and we have a double that share and young adult share.

So I think we have been doing pretty well there.

Congratulations to the team down there.

Okay.

And then I wonder do you have like an overall measure of your product mix in the quarter?

Would that have been positive in the quarter?

I know you had a little challenge of course with Marlboro being down in volume, but was your overall product mix -- do you have a measure you could share with us?

Well, in terms of our volumes, I mean we have the chart in the presentation there, premium, mid and low, that actually the percentage rates have not changed versus last year.

Okay.

Right, that's the best way to look at it I guess, sure.

And then I guess maybe perhaps you answered this question before, but I was surprised by the degree of the OCI increase in Russia given the weakness in Marlboro, but perhaps Parliament was that much stronger that it overcame that.

Would that be the main factor even though you had big growth in the low end?

Look, I mean in Russia first of all we have gained market share, we have kept our volume stable, we had very nice increases on Parliament.

And of course overall we had substantial price increases in the market.

So it's the combination of those elements.

Sure, okay.

And just one last question, you've mentioned, how volumes could be tied to unemployment, that's no secret.

I guess my question would be that as much as you have been strong and diligent about taking pricing and seemingly really focusing on profitability, as you look ahead are there markets, or have you seen this I guess to date where you're having to get a little more promotional because of whether it's down trading or it's just weakness in volume that's forced you to be a little bit more volume sensitive than maybe you would like to be?

You mean in terms of us making promotional price offers or --

Yes, correct.

You promoting more heavily to try and maybe stabilize volume or slow some down trading.

Are there any markets where you have had a move on that to this point?

No.

Look, first of all it plays a much lesser role in the international markets than it does play in the US, so we have to a much lesser extent.

And actually our target would rather be to bring that -- as a general answer to bring it down than up, so there might be here and there a market where we need to do it for a tactical reason at a certain point in time.

But is there a general trend to that, then the answer is clearly no.

Okay.

That's very helpful, thank you.

You're welcome.

Erik Bloomquist of JPMorgan.

Hi.

Good morning, Hermann.

Hi, Erik.

Just wanted to follow up a little bit more in terms of the Polish situation.

Given that the excise tax increases have now been put in place and are unlikely to increase further, is it fair to think that we could gradually see some recovery in Polish volume over time given that the elicit trade doesn't appear to be massively increasing?

Look, I mean, the situation in Poland I would describe that at present we are managing through a very difficult environment.

With all those tax driven and price driven consumption declines in the market, some don't, down trading to OTPs, so the economic downturn, so that is a difficult period that we have to manage through.

On the other hand, now and after the end of this transition period by the end of June, the consumer will see the new prices finally, so there will be another price increase for the consumer if you like by that time.

That being said, going forward in the Polish market I see really substantially improved parameters.

I mean, the excise tax is now in place, the system is being reformed, [lower] rent down, specific rent up, there is an effective MET in place, (inaudible) regulation is in place, so this crazy situation we have seen before should not repeat itself.

There's no new excise tax increase on the horizon.

So I think overall that's going to be okay, and therefore going forward I would say that our performance in the markets is also bound to improve once that has all shaken out, and once we come back to a normal marketing and sales competition in the market.

Okay, thank you.

And then just going back to the Russian situation, could you give us some more precise information on the degree to which pricing has come up in the Russian market perhaps in different segments say since December.

Okay.

Look, I mean essentially if you look at the two recent price moves that we did, then there was December, January, where we went up at the high end by RUB2 and RUB1.5 at the low end.

And then the next one in April where we went roughly RUB2 at the high end and RUB1 at the low end.

Okay, thank you.

You're welcome.

Ann Gurkin of Davenport.

Hello.

Hello.

Hermann, I wanted to ask about the tax raised in the UK or announced increase in the UK on both tobacco and alcohol.

And is this in line and in your forecast, and should we be concerned that we might see a drop in smoking incidents in pubs given prices are going up?

Well, I personally don't think so, because look at the overall price levels in the UK already today.

Okay.

Secondly, you highlighted the higher tobacco leaf cost in the first quarter.

What is your expectation for leaf cost in the second half versus the second half of last year?

Okay.

Look, essentially what happened on leaf there is really that we had to bite the bullet already last year.

I mean the price increase in terms of cash flow came last year, so we bought at those higher prices, and there was a cash impact last year of $480 million.

And now this of course washes into the income statement as you use the leaf.

So this crop is actually going to be a much larger crop, and we expect the situation already to normalize this year, but what you have on stock you have on stock.

So I would say it's something between $250 million and $300 million for our P&L this year.

However, that amount is of course included in our guidance.

That's great, thank you.

You're welcome.

Thank you.

I will now turn the call over to Hermann Waldemer for final remarks.

Okay.

Well, thank you very much for joining us on the conference call.

The investor relations group is available in [Lozan] for follow-up calls, the numbers are on our press release.

I would also like to remind you that our annual shareholders meeting will take place on May 5th in New York City, and our proxy and annual report can be found on our website.

Again, thank you very much, and have a good day.

Thank you.

That does conclude today's Philip Morris International first quarter 2009 earnings conference call.

You may now disconnect.