菲利普莫里斯國際 (PM) 2009 Q2 法說會逐字稿

Good day, and welcome to the Philip Morris International, Inc.

second 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 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 second 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 second quarter of 2009, and comparing them with the same period in 2008.

Unless specified otherwise.

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

Net revenue data excludes 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, adjustments to earnings per share and reconciliations to U.S.

GAAP measures at the end of today's webcast slides which are posted on 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.

Now it is my pleasure to introduce Hermann Waldemer, our Chief Financial Officer.

Hermann?.

Hello and welcome.

During the first earnings call and in the various presentations that we have made this year, we have told you that Philip Morris International, while not completely immune would prove to be very resilient in this global economic crisis.

Indeed our very strong second quarter financial results confirm our optimism regarding our ability to outperform other consumer package goods companies during the recession.

On a currency neutral basis and excluding acquisitions our net revenues excluding excise taxes were up by 6.1% in the quarter and 5.1% in the first half.

While our adjusted OCI excluding currency and acquisitions was up by 9.5%, in the quarter, and 7.5% in the half.

Excluding currency, our adjusted diluted EPS grew by 17.2% in the quarter and 14.4% in the first half of this year.

We have achieved these very strong results, with a single shipment volume that was at the same level as a year-ago boosted by the acquisition of Rothmans Inc.

in Canada last Autumn.

On an organic basis, there is excluding acquisitions, cigarette volume was down 1.1% in the quarter.

And indeed is expected to -- to continue to remain slightly below last yore's level for the balance of the year.

Reflecting consumption declines in several markets that have been particularly affected by the economic Cruz.

In the Asia region, thanks to successful portfolio management, and the absence of recession-driven down trading we had an excellent quarter on all counts.

Volume grew in Indonesia, Korea and Pakistan.

We increased profitability on a currency neutral basis in these and several other markets, such as Australia, and we have clearly turned around Marlboro share performance in Japan.

Marlboro's market share in Japan increased from 19.8% in the second quarter of 2008 to 10.6% this year.

Thanks primarily to the very strong performance of Marlboro Black Menthol launched in August last year and line extended last month into the 1 milligram flavor segment.

As a result, PMIs overall market share was up slightly to 24% in the second quarter.

Another market in Asia, where we are performing very strongly is Korea.

Our market share has increased from 11.8% in the second quarter last year, to 13.7% in the same period this year.

The 1.9 share gain has been driven by Marlboro and Parliament that are up 0.8 and 0.7 share points respectively.

In the Latin America and Canada region we achieved strong income growth and robust market share gains.

In Argentina, for example, our market share reached 73% in the second quarter.

Compared to 70.2% in the same period a year-ago.

The share gain was driven mainly by the Philip Morris brand in the mid price category.

In Mexico, our share grew by 1.8 points to 69%.

As we further reinforced our leading position in the premium segment and our local heritage brand Delicados reached a share of 11.2% up 1.5 share points.

As we anticipated, the EMEA region had a challenging quarter.

Consumer downtrading continued in Russia and started in Ukraine.

Overall volume was soft in these markets and in duty-free outlets that were negatively impacted by use table around the world.

In Russia premium and mid priced brands accounted for 47.7% of our shipments in the second quarter.

Compared to 55.1% in the same period a year-ago.

And in total, our volume was down by 1.3%.

Provided that oil prices do not decline further, and Russia is able to manage potential debt issues in its banking sector, we do not however expect the situation to deteriorate much further during the second half of the year.

Thanks to our strong and comprehensive portfolio across all price segments we were able to increase our market share in Russia during the April-May period to 25.2%, a gain of 0.5 share points over a year-ago.

Furthermore our higher prices enable us to increase currency neutral profitability by double digits in spite of the deteriorating product mix.

The difficult economic situation in Ukraine is compounded by a series of significant excise tax driven price increases and the uncertain political environment.

Following the most recent excise tax increase we have to raise retail prices by between 22% at the high end and 50% at the low end in May.

Our product mix in the second quarter remains relatively stable but our shipment volume declined by 14.1%.

Reflecting both total market contraction and the availability in the market of competitive products and oil prices for a period of time.

At 36.2%, our market share for the April-May period was up 1 share point compared to a year earlier.

It is, however, difficult to predict how the Ukrainian cigarette market will evolve during the balance of the year.

In spite of these difficult market conditions, net revenues in the EMEA region were up 8.5%.

Excluding currency and acquisitions.

And OCI rose by 10.7% on the same basis in the second quarter.

This remarkable achievement reflects the strength of our portfolio across all price segments.

Market share gains in the majority of our main markets, in particular, Nigeria, Bulgaria, Egypt, Romania, Russia, Turkey and Ukraine.

And the successful implementation of higher prices.

The situation in the EU region is clearly improving.

In the second quarter of this year, our market share was up in 15 of our 20 most important markets, when compared to the second quarter of 2008.

Including in France, Germany and Spain.

While Marlboro's overall estimated market share in the EU region remained essentially stable at 18.9%.

Our shipment volume decline in the EU moderated to 3%.

An improvement over the first quarter, 2009 trend.

The solid Marlboro performance in the EU was achieved in spite of the impact of the economic recession and consequently higher unemployment, in particular, in Spain.

The total cigarette market in Spain was down 6.2% in the quarter and it is not yet clear how consumers will react to the recent excise tax driven price increases.

The recent changes in the minimum excise tax in Spain resulted in a significant reduction in the GAAP between fine cut and cigarette prices and our subsequent EUR0.35 price increase across our cigarette portfolio improved our unit margins.

On a worldwide basis, Marlboro volume declined just by 1.1%.

In spite of the continued decline in industry volume in the EU region, the aforementioned decline in duty-free sales and some consumer down trading in a few important emerging markets.

Marlboro is performing particularly strongly in the Asia region.

Which accounted for a growing 22.6% of the brands worldwide sales in the second quarter.

The resilient performance of Marlboro is underpinned by the rollout of its new architecture which expands the brand into three distinct families with unique expressions and the geographic expansion of a number of new innovative products such as Marlboro filter plus and Marlboro flavor plus.

This flavorful, lower tar and nicotine Marlboro Red line extension is performing well across a variety of geographies.

It is now available in 28 markets, and achieved national market shares of 1.4% in lithuania, 0.7% in Slovakia, 1% in Kazakhstan, 2.4% in Kuwait.

2.5% in Romania and 1.3% in Paraguay in the second quarter with moderate cannibalization rates.

The Marlboro Gold family has been extended into slimmer diameter variants with Marlboro Gold Touch and Marlboro Gold Edge.

Marlboro Gold Touch is a new innovative offering in an unprecedented cigarette format.

Designed with a slightly slimmer diameter, to provide a smooth taste and comfort in the hand.

Marlboro Gold Touch was first launched in late April in Austria and is now available in five markets.

Preliminary result are very promising.

In June, Marlboro Gold Touch, already had a growing 1% market share in Italy, 0.3% in Greece and 0.2% in Austria.

We have focused on these fronts behind the super slims Marlboro Gold Edge in Hungary, Poland, Russia and Ukraine.

And the brand is now also available in selected duty-free outlets.

In May, this line extension had national super slim segment shares of 3.7%, 2.9%, 0.8% and 1.9%, respectively.

I mentioned earlier the success of Marlboro Black Menthol in Japan.

It was subsequently launched in hong Kong, where it achieved a 3.1% market share in June.

Just three months after its launch.

It has also been introduced in Indonesia.

A recession is at first sight, not the ideal time to launch premium line extensions.

However, it is always the right time to strengthen one's franchise and reinforce brand equity.

These innovative new products have played an important role in boosting the performance of Marlboro and are expected to position the brand for further growth once the world economy starts to recover.

The cornerstone of PMI's profitability growth on a currency neutral basis in the second quarter, was our continued ability to grow our revenues net of excise tax and to significantly more than offset volume softness and the slightly unfavorable product mix through appropriate price increases.

Our pricing variants in the second quarter reached $549 million.

And this reflects stronger pricing in both developed and emerging markets.

As shown on this chart.

The only key markets that our prices remain at the same level, as a year-ago, is France, Japan and Korea.

In each market, we make our pricing decisions based on local market conditions and an overall assessment of the economic and competitive environment.

As a result, we have achieved this strong price favorability without affecting our competitive position as is underscored by our continued solid share performance in key markets.

Furthermore, there are two countries where a positive impact of our price increase will be felt mostly in the second half of the year.

These are Germany, where we raise prices across our portfolio by EUR0.20 for EUR0.17 and where we're now converting this into corresponding pack prices for EUR0.19.

And Spain which I talked about earlier.

Price increases have resulted in higher government revenues.

And we believe that this is one of the reasons why, with the key exceptions of President Ukraine, excise tax increases that have occurred so far this year have remained moderate and rational.

Our productivity improvement and cost savings program is on track to deliver $500 million this year.

I would like to stress that none of these savings are coming from cuts in marketing expenditure.

As we have continued and will always continue to invest appropriately behind our brands.

During the second quarter, we spent $1.4 billion on the repurchase of 34.7 million shares.

At an average price of $40.33 per share.

This has enabled us to translate net earnings growth of 15.4% excluding currency, into adjusted diluted EPS growth excluding currency of 17.2%.

We have also announced recently, two strategically and financially attractive tack-on acquisitions that will strengthen our business going forward.

Both are subject to regulatory approval.

And are expected to close during the fourth quarter.

In South Africa, we entered into an agreement to acquire the pipe tobacco and nasal snuff business of Swedish Match for some $222 million.

Other tobacco products account for an estimated 30% of the total tobacco market in South Africa.

And this acquisition will strengthen our overall presence in Africa's most profitable tobacco market.

In Colombia, we are planning to complement our existing business both in terms of regional presence and brand portfolio through the acquisition of (inaudible) tobacco of $452 million.

Our business continues to generate tremendous where cash flow which enables us to pay for such acquisitions in cash.

Our free cash flow in the first half of the year reached $4.25 billion.

In spite of the absorption of a $730 million negative currency effect on net earnings and an increase of $241 million in pension fund contributions compared to the first half of last year.

Since becoming an independent Company, we have returned $12.4 billion in cash to our share holders, in dividends and through share repurchases.

This represents the equivalent of about 15% of our market capitalization today.

As you have heard, our business fundamentals remain in very good shape.

In addition, since we issued our EPS guidance for 2009, in early February, we have seen some positive developments with regards to exchange rates.

At that time, we were forecasting a negative currency impact on underlying diluted EPS of $0.80 based on the then prevailing exchange rates.

In the first half of the year, the negative impact of currency on EPS was $0.35.

Based on current spot rates we forecast a further unfavorable currency impact of $0.20 during the balance of the year with the negative variance concentrated in the third quarter.

The continued strength of our business and the improved currency outlook enable us to raise our EPS guidance for 2009 from its previous $2.85 to $3.00 range to a level of $3.10 to $3.20 per share.

The new guidance, includes the $0.04 charge related to our investment and cooperation agreement in Colombia.

On a currency neutral basis our new guidance translates into a growth rate of approximately 10% to 13%.

I will now be happy to take your questions.

Thank you.

We will now conduct the question-and-answer of the portion.

(Operator Instructions) Our first question comes from the line of Thilo Wrede of Credit Suisse.

Good morning, Hermann.

First question I have for you is on Marlboro.

You said you lost 1.1% of volume there.

Are you concerned about the performance of Marlboro and is there anything you can do to improve that other than waiting for the global economy to improve again?

Look, I think -- I am not concerned.

Actually I am very happy with the performance of Marlboro.

And I think this is thanks to the tremendous innovation that we have brought into the brand, from every aspect from packaging to technical to product innovation.

That is something that certainly will payoff.

It helps the brand now to show the excellent volume performance in a difficult economic environment.

And positions the brand very, very, well for growth once the economy will recover.

Okay.

And then, switching to Turkey, smoking bans are being implemented there now they are a lot stricter than what we had before.

What is the outlook for the country there?

Look, I mean smoking bans we have seen around the world.

They are by now implemented in most countries.

So now you have them in Turkey as well.

This is always a one-off adjustment in total consumption, a bit steeper at the beginning and then smoothening out once consumers also have adapted to their smoking behavior to a new environment.

More important actually, I believe for the Turkish market is the further increase of the minimum tax in there and the corresponding price increases that we have implemented in this market, which drive further unit volume profitability.

Okay.

And could you -- could you elaborate a little bit on your view of the Russian market when you think that it will return to more normalized volume growth rates again and how much longer will the downtrading last there?

Well, -- I mean, a lot will depend really on the oil price, one, because the oil price has a direct impact on the rubel exchange rate and in many aspects there is dollarization in the economy.

I will say that -- I wouldn't expect much further deterioration of the downtrading trends.

However, this is not over.

Let's not be blue eyed.

I mean, there unemployment is now about 12%.

Which is double what it was in 2007.

So the crisis is not over in Russia yet.

The good thing is that we have a complete portfolio and to keep the smokers in the franchise, we keep -- we have increased market shares as I said earlier.

Do you wish had you a more discount skewed portfolio for the Russian market?

A more what?

A more discount skewed portfolio in the current environment in Russia.

We have two great brands down there, Response and Optima, we don't need more than that.

Thank you very much, Hermann.

You're welcome.

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

Hey, Hermann.

Hi, Judy.

Just following up on Russia here.

In the first quarter you actually saw the super premium segment acting much better then it sounds like in the second quarter the super premium segment also slowed down or was even down -- can you maybe explain what happened to that part of the segment and is it just all economy and the first quarter for whatever reason that that segment was up and now you're starting to see a slowdown on that part?

You're right.

The super premium segment also is weaker than it was in the first quarter.

So Parliament sales are down 2.4% ex the distributor sales in the second quarter whereas they were still growing in the first quarter.

So that segment remains more resilient than premium and higher end of the mid price segment and the growth remains very strongly in the low segment.

So yes, it has been touched somehow but just that the super premium is more resilient than a premium that remains the case.

Okay.

And then in Ukraine, are you surprised by the rate of volume decline post the price increases?

I know you have seen signs that consumers are beginning to adjust to higher prices or is this something that will continue to be under pressure for a few quarters?

I would say there will be clearly downtrading in the Ukrainian markets.

To what extent we have to see.

You could not see that really yet in the -- in the second quarter or in the month of June.

Because there were all these still -- oil price products in the market.

It is with the consumer now, we have to see.

I mean downtrading will clearly be there, to what extent, hard to say.

Okay.

And it looks like in the second quarter, the rate of margin improvement was actually pretty favorable even, I guess, with some of the transactional exposure that you have in certain regions, can you walk us through what is driving the margin improvement?

Well, the margin improvement is of course -- is from two angles, the two classical angles.

One is, and the most important is of course revenue growth.

And revenue growth was of course also driven by the pricing decisions we took.

On the other hand as you know we always do our homework on the cost side and we have continued to implement our pre-existing cost-cutting programs across the Company, that is why I said that I am very confident that we will achieve another $500 million this year.

Okay.

And then, in terms of your guidance, just to get clarification, your prior guidance of constant currency EPS growth was 10 to 14%.

Now it is at 10 to 13%.

Is that just that $0.04 charge that now you're including for the full year?

That's exactly it.

Okay if I look at your year-to-date performance your constant currency EPS growth is running up closer to 14%, which does imply in the back half maybe you're expecting some slowdown.

And I am just wondering are there specific factors that you think could drive that slowdown or is it just being somewhat cautious because of the macros and so forth?

No, look, I mean this is our full-year guidance, that is very, very consistent from what we said from the very beginning.

Really I mean, the change, is coming also very, very much from the currency where the $0.80 simply has become $0.55, if I apply the spot rates of the beginning, of this week.

Our underlying business is as strong as we predicted it from the very beginning.

Okay.

Thanks Hermann.

You're welcome.

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

A few things I wanted to ask you.

First, Hermann, I realize that pricing and mix are paramount in the business but is the overall growth algorithm that you've outlined sustainable over the intermediate term in the next several years if volumes are not growing?

I think that growth is sustainable.

I would say that there are even four reasons why believe that is sustainable.

I mean, the first one, if you look at the year-to-date growth that you have seen there, on the pricing variance, that has been achieved, without the participation of two major markets, which are Germany and Japan.

The second reason is, that actually most of these we just talked about Ukraine, that would be an exception.

That is why I say, most.

Most increases were not abrupt, they were not high above inflation.

Third reason really is that if you look to the excise tax structures which are so important as we all know in that domain, have improved around the world, minimum taxes, you name them, you have just seen what happened in Spain.

The government restructured excise taxes there.

And the fourth point is really, also, after those price increase, if you go to the emerging markets the relative affordability of cigarettes is still very, very good.

In all those markets.

Remember earlier, when you compare it to big mix to local peers and stuff in Russia and Ukraine it comes out well.

Okay secondly, Hermann, can you talk about the share repurchase intent and sort of the capital structure objectives post-next May?

We're getting closer to when you're going to complete the existing authorization.

Is there any reason why the pacing of share repurchases, again, over the intermediate term shouldn't at least remain at the current rates?

Well, I can only comment on our existing share repurchase program.

Which as you say, it still goes on until the 30th of April of next year.

That is still quite awhile.

We will take a new decision then.

The existing one, we will continue to repurchase on a steady pace, nothing has changed toward what I said earlier that you can expect a dollar amount roughly in the same range of 2008.

I think we have done an enormous lot since the spin-off.

We have returned $4.3 billion in dividends and $8.1 billion in share buybacks.

So that is quite a bit.

For the future we will decide when the future is there.

The Board will decide when the future is there.

Okay.

And then within the EU, Hermann, two questions.

How much of the improvement in the profitability is due to the favorable variance in the Czech Republic and also why do you think market volumes appear to be strengthening in Germany and France?

Could that be somewhat linked to fewer nationals traveling given the economy?

Thank you.

Okay.

A little bit.

But that will be, the last argument less traveling, that will probably be before the UK.

But they are in terms of total volume, it is not as important than for others, for us.

Somehow, yes, but, I mean, the thing really is if you go to Western Europe, I mean, the smoking bans are all in place.

Greece we talked about earlier was the last to follow.

So therefore the year-on-year comparisons are of course now easing.

So there is always especially you mentioned the Czech Republic that has come back to normal thanks God, but if you look at Western Europe, then Western Europe now within the EU region, the Western part that was down 4% in the first quarter, and only 2.2% in the second quarter.

For the Central European, i.e.

(inaudible) the EUR64 minimum excise tax adjustment is mostly done so, you take all that together, that is why I see simply easing pressure on total market volumes.

To remain at the decline.

Let's not be blue eyed here but the decline rates will moderate.

Actually, Hermann, was there a change in the allowed deductibility of certain expenses for corporate income tax for Indonesian tobacco manufacturers and is that going to have any noticeable impact on your consolidated income tax rate going forward?

You're right.

There was a change, the tax deductibility of advertising expenses in Indonesia has been limited to $10 million per year max.

Our expenses are, of course, higher.

That will lead to a higher local Indonesian tax.

But within the overall PMI worldwide tax which is a system as you know of crediting foreign taxes paid against U.S.

taxes due, so therefore, I do not expect any meaningful impact of that new regulation on PMIs worldwide tax position.

Okay thank you very much.

You're welcome.

Your next question comes are the line of Adam Spielman of Citigroup.

Hello, thank you very much.

Obviously you have had excellent pricing variance this quarter.

And I notice it was a little bit more than in the first quarter.

And I was just wondering if you could tell me which of those incremental countries where pricing has been -- has driven that improvement in pricing variance, and if you can discuss just the background to that improvement from what was already a very high level to an even higher one?

Well, look, I mean, I ought to put it this way, huh?

The only countries where you haven't seen pricing yet were, France, Korea, and Japan.

So, you had to really -- in a broad range, so -- it is -- it is Russia, it is Ukraine, it is Indonesia, it is -- it is all over, huh?

It is really across -- across the world.

Those are the markets where it was even better in Q2 than it was in Q1, the Russia and Ukraine I guess?

Yes, I wouldn't know the pricing variance of every market, but those two, yes.

Thank you.

And as you look forward into 2010 obviously we're still likely to get pricing but am I right to assume that it might be still good but perhaps less exceptionally good than it is this year?

Look, that is the question of the sustainability that we had earlier.

Really my answer would be there, that of course I can't predict what pricing will be.

I don't know.

We will see, we will decide always in the future.

So I can't comment on future pricing.

All I'm saying is that if you look at today, then this pricing variance has been achieved without Germany, and Japan.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Christine Farkas of Banc of America, Merrill Lynch.

Thank you very much.

Good morning, Hermann.

Want to get back to the pricing variance the $549 million you mentioned in the quarter which looks like offset about $141 million in negative volume and mix impact.

I just wanted to understand if I did the math correctly that suggests about 8 points of pricing variance offset by 2 points of negative volume and mix.

How did that compare to the first quarter in light of the EU getting a little bit better at further downtrading in Russia and the Ukraine.

How should we think about the mix part of that?

Look, I mean you're right.

If you compare the pricing to the negative volume mix then the pricing is about 4 times, if you take it across PMI, that amount.

I mean, the noticeable changes of course in the EU, but also strong pricing in EMEA and in Asia.

There the ratios in Asia will be kind of 1 to 12.

And would you say the mix was -- was similar in the first and the second quarter, again with those two regions, EMEA and EU.

I am just trying to understand which one is offsetting the other as we go through the year.

Wait a minute, the--?

The 2-point--?

Yes, in the -- in the second quarter -- I mean, in terms of negative volume mix, the biggest portion is of course the EU, with $77 million.

EMEA with $50 million.

(Inaudible) with only 4 and Asia with only 10.

That is the 141 that you were previously quoting.

In the first quarter, I mean, EU must have been more negative than this.

Clearly.

Because of stronger -- stronger declines in the markets.

So that is of course why we also said that really, the EU region has shown a marked improvement and I would even say that the EU region today shows you that the business model works there for a declining market where nevertheless profitability is rising.

Okay.

Great.

Forgive me if you have actually disclosed this.

I didn't hear it.

Did you tell us what your savings or chief savings were in the quarter and year-to-date?

No, we don't go quarter and per year-to-date.

It is just -- I am -- we do, however, regular review where we stand on the yearly number, and for the yearly number, I've said that we will achieve the $500 million again which as well is what we did last year.

Okay and final question Hermann.

Are there any changes to your outlook for tobacco leaf pricing or inflation in that cost of goods component?

Look, the situation on leaf has come down today.

The offer and demand of leaf is in balance so you won't see further, much further price increases or no further price increases.

The price reductions versus last year, however, they will not be much.

And in terms of the price increase that you saw last year, in that sense, the damage has happened.

Because the damage happens when you buy the leaf in cash.

And then in the income statement, of course washes in when you use that leaf, so in the -- in the first half, we had some -- what was it?

Some $80 million, I believe, in negative yes, $80 million negative on leaf.

The estimate for the full-year, is something a little bit short of $300 million, impact.

But of course all that is included in our guidance.

Perfect.

Thank you very much.

You're welcome.

Your next question comes from the line of David Hayes of Nomura.

Good afternoon.

Hi.

I want to -- just like to come back to the acquisitions that you have made recently, South Africa and Colombia.

Just in South Africa, is that a quiet focus operation now for you or do you see thats as being a route to trying to take some share in that market, is that an opportunity for the cigarette portfolio as well piggy backing the acquisition?

And then just in Colombia, two questions.

One, is regulatory, it looks like you have big market share there now.

Is that a concern for you, is there any risk at all of the regulator throwing that out and I guess if not what kind of synergies you would expect to achieve in that market?

And then just on a couple of detailed elements on the FX 551 in the second quarter, wonder if you could split that between translational and transactional?

So I can get a feel of how much transactional impact there was in the FX number in the period?

Thanks very much.

Okay that is a lot there.

Where do you want me to start?

Start in South Africa and around the world, how is that?

Okay.

Look, in terms of acquisitions, I mean, what you see there is just a continuation of what we do in that area.

We are always interested -- we're always looking at financially attractive and strategically compelling acquisitions.

I believe that is the case for both of them.

You have to see that first South Africa is actually Africa's most profitable market.

Then -- that also, this gives us access to 30% of that tobacco market, not cigarette but tobacco market.

So the pipe tobacco and the nasal stuff.

So therefore we now will have a meaningful presence in the market.

We will have an experienced organization, that we get into our existing organization, so that helps a lot and gives us a scale in that market, so therefore, financially and strategically definitely a compelling investment I would say.

Colombia is about regional and portfolio complementation of our activities there.

Look, we believe in this country, in the prospects of this country.

We believe in the cigarette market of this country.

Yes, our acquisition there is of course subject to regulatory approval by the Colombian competition authorities.

We believe that our agreement fulfills the legal requirements necessary and that therefore, we also believe that the Colombian competition authorities should and will approve that transaction.

On the currency, there the thing always is, look, this translation and transaction discussion, I would actually love to say a couple of principal words on how currency should be eliminated there, I believe.

The purpose of currency elimination is to measure the performance of underlying business.

In my opinion and that's why we do it that way and therefore the quality of management.

If you ordered DMD in Russia you have no influence on the rubel, euro or dollar exchange rate.

So therefore we eliminate currency on all P&L items versus the bottom line only.

I think that's the way to do it because if one would not do that, I really think that, i.e.

with the argument that currency driven input cost increases should be matched with the local currency price increases, then I respectfully would disagree with that because the reason for price increases are -- are multi-- multifaceted, it's competitive position, excise tax, inflation, affordability, and also currency and cost.

And I simply think that if we will do it different, then, we would understate constant currency growth when currency is against you, and overstate currency, constant currency growth when currency is with you.

But that being said, consistency is key.

We eliminate currency on all lines since I can remember since I'm in this Company which is more than 20 years.

Okay thank you.

Thank you very much.

Appreciate that.

You're welcome.

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

Hi.

Couple of questions.

First of all, obviously Chesterfield was one of your biggest growing brands until recently.

Do you think -- has that been somewhat deemphasized with the rollout of the Marlboro new architect or is that just a particular market problem in terms of the $0.09 decline we've seen there?

No, no.

It is two things here.

The Chesterfield growth was coming very strongly from the Ukraine and from Russia.

So and it is a brand that is positioned at the high end of the mid-price segment.

So therefore, if you like, a little more vulnerable in such an economic crisis, that's why you see the down trends there.

Has it been hurt by the innovation going out on Marlboro?

Well, that I would say it is like in the car industry.

You innovation first goes into the premium models and then it trickles down to the cheaper variants of the car park.

So I think it is normal situation there and I think we are doing it in the right sequence.

Just out of interest looking at the L&M performance.

There has been quite a lost emphasis on trying to turn around that brand.

Are you happy with the performance as it stands or is that gain is that just due to Russia and Ukraine or does it show a better resilience within the market segments in existence?

No, I mean the gains are actually coming from Germany and from Spain.

That is where the brand is really doing extremely well.

It has established itself in Germany, as our second leg.

Which is very important.

I mean, in the second quarter, L&M there has 8.4% market share and it has about double the young adult smoker share so very positive development there.

In Spain, variable (inaudible) put it under the umbrella that we are very happy to have a complete portfolio, also there.

Because that is certainly part of the reason for the increases in Spain, as I have said, I mean the situation there is really difficult, let's see place going to come there.

You will see downtrading in Spain in the third quarter.

There is no doubt.

But within the portfolio, you will certainly see volume and market share growth for L&M.

Do you think -- just following on from that do you think Germany as well, clearly you have got the price increases going through in June you have the move to 19.6 in July.

Germany has been downtrading anyone.

Is that going to accelerate the down trading in Germany do you think?

Look, I always disagreed that there was consumer downtrading in Germany.

You would rather have somebody positionings of international brands to the lower end of the market which made some consumers follow.

But that is behind us.

I would say.

To the contrary, I mean, if I go to Germany today, then I would say I am pretty happy in particular with the Marlboro performance because I mean the decline rates that we have seen for the brand still at the first quarter of 2008 of 1.4% and verse the year before, now we talk about 0.4 and actually Marlboro is also now again increasing its young adult smokers share there.

No, I'm not concerned in that sense.

This is just migrants, but you mentioned obviously this $0.04 for Colombia, this investments and cooperation agreements.

So can you explain -- I must have missed the -- what is the -- what is it your dealing with the Colombian authorities on?

Well, look we have -- an investment and cooperation agreement that we have previously announced, with the Colombian government and with all the provinces.

So this agreement has several purposes.

First of all to fight contraband and counterfeit product in the market.

That is training of enforcement agencies, that is equipment for enforcement agencies and secondly a very important point to generate, grow more and better quality Colombian tobacco and thirdly to promote investment in Colombia in general.

That's why I said earlier we believe in that country and in its future.

Right, right.

And is this -- this is just PMI.

This is not the rest of the tobacco industry?

This is PMI.

Right.

Okay, thank you very much.

You're welcome.

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

Good morning, Hermann, or afternoon to you.

My first question, I don't think you have answered the question but I'm just curious on just a mix portion of the top line maybe you could give it if it is not possible that number to give like how your percentage of shipments came out in the quarter like from premium, mid tier and low-end products.

Could you discuss that?

On a global basis I cannot.

I -- we gave the negative volume mix numbers in dollars for the various regions in there and, quite frankly, as you can see, given the overall economic environment, I would say that $141 million on the size of our business is a very moderate number.

This is a very moderate volume mix decrease.

I mean the impact of course that you have, is if you go to Russia, of course your volume mix increase, decrease there will be more accentuated.

On the other hand, as you know the pricing variance there is also more accentuated and is more than compensating for it.

I can leave that one there.

The other question I had was you mentioned in the release in Poland about some intense price competition.

I was just curious as you look across the world if there are other markets where you're seeing that flare up, for example, where you're seeing more challenging competitive conditions from a pricing standpoint?

No, what all I would not -- I would not say that.

I mean there are some battle fields always here and there, but from the statement on Poland, that that is perfectly right, one could not actually conclude anything for the rest of the world.

Poland is just a situation which I personally don't understand that there are still some old products in the market where taxes are being absorbed.

Okay.

Then the last question I had for you was just a Company -- or was a country question, and that's relative to Lark in Japan.

And that brand share I believe you said was down in the quarter.

That's one that has been, in a state of kind of recovery or vitalization for over a year now.

Has that stalled at all?

Are you seeing any improvement there in the performance for Lark.

No, no.

Look I mean, quite frankly, for Japan, Marlboro was our priority number one.

You can't do everything at the same time.

I think we have focused very successfully on Marlboro.

That does not mean that we forget about Lark.

I mean, actually we had Lark Classic in the test market last year.

That has been expended now nationwide.

Now, in about the same area we have now Lark Mint Splash, in test, it has 0.4% market share in that testing area.

The Mint Splash means there is a capsule in the filter, which when you squeeze, you get a different taste, in addition to the -- to the normal Menthol taste that you had before.

So, we keep on working on Lark.

It is just a question of priority, one after one.

But now Lark has become a priority for us by now.

Okay, thank you very much.

You're welcome.

(Operator Instructions) Your next question comes from the line of Erik Bloomquist of JPMorgan.

Hi, Hermann.

Hi, Erik.

Just one follow-up question with respect to pricing.

You noted that one of the markets that PMI had not had pricing in is France.

We saw some comments in the press there could be a tax increase in France next year.

Specifically a specific tax.

I was wondering two things.

A, I am assuming this could provide an opportunity to pass that through and take price and B, are we actually talking about an increase in just a specific tax or could it indeed be a change in the tax structure in France?

Anyway your thoughts on that would be appreciated.

Well, I would say that -- that discussions about the tax structure in France are pure speculation, really, and on pricing itself, that is forward-looking pricing, I'm sorry.

I cannot comment on that.

The most important area in that area is actually Japan.

That is still we do not have a business model that works for a total market that is declining and will continue to decline.

So to have price control in place, in that market, is of course anachronistic.

Let's hope that one day that is going to change and that remains our focus.

If I could follow-up then on your comment on Japan.

I mean, we have a major election coming up at the end of August and the party that looks likely to win has suggested they will be more aggressive in taxing tobacco.

Could that be a catalyst for changing the environment within Japan for pricing?

Well, of course if the entire political environment in Japan changes then many things will change, however, I would not dare to predict today, what that exactly would mean for us, for the cigarette industry.

I mean, look, I think simply that the arguments are on our side.

That a business model that works must be found for that market.

And that moderate regular excise and price increases are for any country around the world, including Japan, the right way to go, and that this must allow the manufacturer to adjust their prices within their own decision.

In the chief margin improvements.

So all that makes sense.

And we will continue to bring that forward, whoever then is in charge, both in the government and in the administration.

Okay thank you.

You're welcome.

Your next question is a follow-up from the line of David Adelman of Morgan Stanley.

Hermann a quick question a follow-on to the contraband agreement in Colombia.

You're now paying for that kind of effort in Canada, if my memory is right, throughout the EU, now in Colombia.

Do you foresee the need to, for the corporation to spend its money in significant additional other markets over the next several years, and that type of agreement?

No, I don't think so.

I mean, you have to see these things one by one.

And you see them in Colombia, I gave you the reasons there, I mean, better quality, Colombian tobacco in more quantity of Colombian tobacco makes perfect sense for us.

So that is a Colombian question, but not a worldwide question.

Thanks.

At this time there are no further questions.

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

Actually, Nick, will take it but that concludes our conference call for today.

The investor relations team is available in Lausanne, should have you any follow-up questions.

So thank you all and have a great day.

Thank you, that does include today's Philip Morris International, second quarter 2009 earnings conference call.

You may now disconnect.