菲利普莫里斯國際 (PM) 2009 Q4 法說會逐字稿

Good day and welcome to the Philip Morris International fourth quarter 2009 and year end 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 conclusions 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 fourth quarter and year results.

You may access the release on our website at www.pmintl.com.

During our call today we will be talking about results in the fourth quarter or the full year 2009 an comparing them with the same period in 2008 unless I stated.

References to volumes are for PMI shipments, industry volume to market shares are the latest data available from a number of internal and external sources.

Organic volume refers to volume excluding acquisitions.

And net revenue data excludes excise taxes.

You'll find data tables showing how we made adjustments to net revenues and operating company's income or OCI, for currency, acquisitions, asset impairment, exit and other costs.

And adjustments to earnings per share as well as reconciliations to US GAAP measures.

At the end of today's webcast slides, which are posted on our website.

Today's remarks contain forward looking statements and projection of future results.

And I direct your attention to the forward looking and cautionary statement disclosure in today's presentation and news release for review of the various factors that could cause actual results to differ materially from projections.

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

Louie?

Thank you, Nick, and good afternoon, ladies and gentlemen.

It's a pleasure to review our fourth quarter and full year results with you and share our outlook for the coming year.

Our performance in the fourth quarter was strong across all financial metrics, and helped us to achieve a full year financial performance that met or exceeded our mid to long term targets.

These results were accomplished despite the challenges we faced in numerous markets that bore the brunt of the global economic downturn, and a testament to the vigor and breathe of our brand portfolio, the geographic diversity of our earnings and the inherently favorable characteristics of the industry in which we are privileged to participate.

And most notably, the pricing power that we enjoy relative to the broader consumer package goods sector.

Our volume performance in the fourth quarter was solid.

In part reflecting the reversal of the timing issues that dampened our third quarter numbers that had caused such unnecessary anguish at the time.

Full year cigarette volume fell marginally below the 2008 level.

And on an organic basis was just 1.5% lower.

While any volume erosion, even if models tends to garner a disproportionate attention.

In this instance I would venture to say that our performance was, in fact, quite solid.

The combination of stubbornly high unemployment levels, lower discretionary incomes and tax induced pricing took their toll on volumes.

Most notably in Spain, Ukraine, the Baltics, Romania, Serbia and Columbia, which all suffered extraordinary double digit contractions.

Indeed, absent those six markets, we are the market leader in four of them, we would have posted a marginally positive organic volume growth number for the full year.

Our market share performance was one of the key highlights of the year, with 70% of our top 30 income markets registering a stable or growing trend.

Those few markets that incurred share erosion suffered to varying degrees from either consumer down trading or competitors seeking to bolster their share by fully or partially absorbing excise tax increases for several weeks or months.

The widespread nature of our solid share performance is under scored by our momentum in both OECD and non OECD markets, which reflect the impact of our product innovation and enhanced consumer engagement activities as the year unfolded, and the gradual elimination of the price advantage enjoyed by some competitors.

A much-discussed concern over the last few quarters has been the fate of the industry's premium segment and whether or not consumers will slowly abandon it and seek the lower priced products.

The evidence clearly suggest that such a phenomenon has been relatively restrictive, and that the potential for widespread contamination did not materialize that some may have feared.

While the premium segment suffered significant erosion in several markets, and most notably in Spain, Russia and Germany, it held up remarkably well in markets as varied as Turkey and the Ukraine.

And in the quarter, actually, sustained its growth momentum in markets such as Argentina, Indonesia, Korea, Poland and Greece.

The disciplined rollout of Marlboro's new brand architecture continued the pace as the year unfolded.

While the brand's overall volume performance suffered from the market contraptions that occurred primarily in the European Union and in Eastern Europe, it fared remarkably well in numerous markets.

Volume growth of 4.3% in Asia was particularly noteworthy, with solid market share performances in Japan, Korea, Indonesia and the Philippines.

The admittedly early signs of the brand's new architecture are positive, and our efforts to enhance the brand's vibrancy are starting to bear fruit.

The brand's demographic profile has responded as intended, and it is gaining share in both developed markets, such as Italy, Japan, Korea, the Netherlands, Portugal and Greece, and developing markets such as Argentina, Brazil, Indonesia, the Philippines, Romania, Algeria, Morocco and Poland.

While much remains to be done, we believe that we are on the right track and that the brands consumer appeal will be ever stronger going forward.

I would be remiss if I did not highlight L&Ms performance in 2009, particularly in the fourth quarter.

The brand exemplified the strength of our portfolio and the key strategic walls that it and the others played in our operating model.

In the European Union, L&M's volume grew by close to 9% in 2009.

And was up over 17% in the fourth quarter.

It's performance was such that it more than offset Marlboro's volume erosion in the European Union during the quarter.

Also of note, the long hopefully stabilization of the brand, historical strong hold in Eastern Europe appears to have now materialized as evidenced by the fact that L&M's volume was flat for the quarter in this important region despite continued share erosion in Russia.

Net revenues of $25 billion rose 7.5% for the year, excluding the adverse currency hit of $2.6 billion.

And we're up 5.3% for the full year excluding currency and acquisitions.

In the fourth quarter currency turned in our favor and net revenues were up a sharp 9.7% or 7.2% excluding the favorable impact of currency and acquisitions.Adjusted operating companies income increased by 8.7% for the year, and 8.9% for the quarter.

Both excluding currency and acquisitions.

For the full year, our adjusted OCI margin rose a full 1.4 percentage point to reach a level of 42.8%.

Again, on a constant balance basis, with each region contributing to the strong performance.

Pricing across the vast majority of markets was the key driver of our strong constant currency operating company's income growth, contributing nearly $2 billion to the full year, and just under $500 million for the fourth quarter.

This was partially offset by an adverse volume mix variance of $570 million for the full year and a more modest $90 million for the quarter.

Of particular relevance is that the price variance offset the adverse volume mix variance by a ratio of 3.5 to 1 for the year and 5.2 to 1 for the quarter.

Those ratios will hopefully put to bed the end of the debate on the appropriate balance between volume and impact.

Adjusted diluted EPS for the full year increased by $0.51 or 15.4% on a currency neutral basis.

The principle contributors to this strong constant currency performance were operations growth of $0.47 and the impact of share repurchases as $0.19, partially offset by an increase in interest cost of $0.17.

As a quarter, adjusted diluted EPS rose $0.11 or 15.5%, excluding a marginal unfavorable currency variance of $0.01 due to adverse currency on the interest and tax line more than offsetting the modest benefit on the operating line.

Operations growth contributed $0.09 and share repurchases $0.06, partially offset by higher interests costs of $0.04.

Discretionary task rate, defined as operating cash flow less capital expenditures, ultimately the most important metric, increased by 4.9% or $333 million, to reach slightly more than $7.1 billion in 2009, despite an estimate adverse currency impact of $1.5 billion.

Absent currency, discretionary cash flow would thus have increased by 26%, in part due to our tight management of working capital and the favorable results of our determined efforts to seek stricter forestalling rules.

Our strong cash flow performance enabled us to continue to reward shareholders.

We increased our dividend by 7.4%, for an annualized rate of $2.32 a share in September, and by year end have deployed $5.5 billion to repurchase close to 130 million shares or 6.5% of shares outstanding at the beginning of 2009.

All in all, 2009 proved to be a very solid year, especially within the context of the global economic downturn with which we all had to content.

And I'm particularly pleased that we achieved most of what we had set out to do this year.

The fragility of the economic recovery and its geographic disparity, coupled with its uncertain impact on employment levels and potential currency volatility, naturally warrants a cautious outlook for 2010.

Given our momentum, however, we remain optimistic that while our organic volume performance is likely to parallel that of 2009, reflecting further market contraptions, we will again post strong financial results this year.

As announced in our release, we project reported diluted EPS of between $3.75 to $3.85 in 2010, reflecting a growth rate of some 16 to 19% off our 2009 EPS of $3.24.

Our prevailing exchange rate will benefit from a modest tailwind.

And accordingly our guidance assume a constant currency reported diluted EPS growth rate of some 12% to 15%.

Compared to our 2009 adjusted diluted EPS of $3.29, this new guidance projects a growth rate of approximately 14% to 17% or 11% to 14% excluding currency.

The key driver of our earnings growth will continue to be pricing.

Of note, is that we have already secured some 2/3 of the pricing that is embedded in our guidance, and remain confident that the remaining sales will be secured.

The potential for disrupted excise tax increases is always a risk.

So far this year we have witnessed abnormal increases in Greece, Turkey and Romania, which will undoubtedly effect indiscrete volumes there.

More important than the increases to sale, however, especially over the longer term, are potential changes in the structure of excise taxes.

And on this front we continue to witness a rational and virtually universal approach.

Greece is a notable exception.

There, the government increased the excise tax incidence in January from 57.5% to 63%, an increase of 5.5 percentage points, while actually reducing the minimum excise tax burden.

In our humble option, such an action will stimulate significant down trading and revenues will fall substantially short of the government's expectations.

In Japan, the government has called for a 70 yen per pack of 20 cigarettes, or 40%, excise tax increase effective October 2010.

And Parliamentary approval is excepted to be secured by the end of March.

Apart from taking into account sales taxes and current trade margin levels, implies a minimum price increase of 82 yen per pack of 20 cigarettes, to remain revenue neutral on a percent basis.

Even such a minimum increase in the notoriously price-sensitive Japanese market will, frankly, put us in uncharted territory.

But in an effort the consequence will be the industry volumes will fall severely in the fourth quarter and in 2011.

The precise extent of the damage remains to be seen.

However, this heavy toll may ultimately prove to be beneficial over time, if the industry simultaneously secures the pricing freedom that has eluded it in the past.

We remain cautiously optimistic that such freedom will be granted.

As was the case in 2009, we believe that the premium segment in select markets will continue to be under pressure, especially if unemployment remains an intractable issue.

But we do not believe that such adverse forces will be either pervasive or particularly disruptive.

Indeed we anticipate continued widespread share growth as we further deploy our product innovations and continue to perfect our adult consumer engagement activities, equity enhancing promotions, point of sale presences and distribution infrastructure.

On the cost front, we anticipate productivity savings of some $500 million.

Essentially in line with the level achieved in 2009, and we also project continued improvement in the management of our working capital as we optimize inventory levels across our entire supply chain.

As previously announced, we believe that our discretionary cash flow growth rate will outpace that of our earnings this year.

Our optimism regarding the future is underscored by our announcement this morning of a new three year, $12 billion share repurchase program which will run out of May upon the sole completion of our previous $13 billion two year program.

We anticipate that our total 2010 share repurchases will be in the $4 billion range.

We believe that this new program strikes an optimal balance between our relentless desire to continue to reward shareholders, while retaining the financial flexibility with a strong balance sheet and credit rating entails.

All in all, we delivered very solid results in 2009 despite a challenging economic environment.

We met or exceeded our principle financial targets.

And we did so in a high quality manner.

We entered 2010 with significant momentum and a potential currency (inaudible).

Thank you.

Hermann and I will now be pleased to field any questions you may have.

Thank you.

We will now conduct a question and answer portion of the conference.

(Operator's Instructions)

Our first question is coming from Thilo Wrede of Credit Suisse.

Good afternoon, ladies and gentlemen.

Could you give us an outlook or your idea how the Russia market will behavior this year?

Will we eventually see a peak of the down trading there?

And also, what's your outlook for Canada and the impact this enforcement of contraband cigarettes could have on the market there?

We anticipate the trends are likely to remain similar to what we witnessed in 2009, Thilo.

As the year unfolded the premium segment down trading, actually, abated somewhat.

The mid-priced segment, however, down trading continued to the value segment, and we don't really anticipate much of a change there as the economy recovers in Russia.

I think hopefully towards the second half we'll see improvements and hopefully certainly in 2011.

But I would say in the first half certainly that the trends we saw in the fourth quarter which were better than the previous nine months will probably continue.

In terms of Canada, as you know, industry shipments were up in 2009, and we are hopeful that the enforcement activities being taken will continue and hopefully that will also favorably affect industry shipments, and therefore our own volume, because we continue to anticipate share growth of our business there.

Okay.

And then what's your reason for the cost as optimistic regarding pricing freedom in Japan?

Can you share that with us?

Well, as you can imagine we've been in discussions with the government and particularly the Ministry of Finance, and the indications we've had so far is that they would be favorably inclined to giving us pricing freedom.

That's the Ministry of Finance, and we'll see as things unfold.

I think we'll get a much better picture within the next month to two months.

Okay.

And lastly, and I think the discussion about generic packaging in the UK has increased again in the last few weeks or months, do you see that as a realistic risk and is that something that could spread to the rest of Western Europe?

Well, let me first put in context, yes, the Minister of Health in the UK recently gave a speech in which generic packaging was mentioned.

I would say that the speech was cautious in terms of such an action, and for the very first time the minister recognized the potential ramifications in terms of intellectual property and the trading or free trade arrangements that they have.

So I think people are beginning to recognize there are significant issues, the main one being that there is no evidence whatsoever to suggest that generic packaging would affect total consumption of cigarettes.

In fact, certain governments, and particularly Sweden and New Zealand, have declined proposals to look into generic packaging specifically for that reason that there is no evidence to suggest that it helps in terms of total consumption which ultimately is the objective of that measure.

So I do not believe that it is something that others will follow.

It remains a risk, but I think the industry has some very pertinent and powerful arguments against generic packaging, not least of which is the unintended consequence in terms of counterfeit and contraband.

Thanks a lot, Louie.

Your next question comes from David Adelman with Morgan Stanley.

Good afternoon, Louie.

First just as a follow-up to plain packaging, Louie, if any country were to mandate generic packaging, just to be clear, is it fair to assume that you would do everything possible within the law to act aggressively to protect your intellectual property and trademarks?

Yes.

Okay.

Secondly, in terms of the local currency operating profit growth that's embedded in the 2010 forecast, Louie, the last two years you've been either at the high end or above your targets, 2010 it's essentially consistent with the target, is that under conservatism or is there something that you see in the markets that would indicate that 2010 might be a bit more challenging operationally than 2009?

I think as I said in my remarks, David, the economic recovery is extremely fragile and I believe that one has to be cautious when one's sitting in January looking at the year.

We know for a fact that given the tax abnormal increases, specifically in Turkey and Greece, that will hurt this year.

There will be offsetting marks as is always the case, but I don't think there's anything that is out there other than Japan, as I mentioned in my remarks, which remains an uncertain picture today and that's probably what you're seeing in terms of the local currency organic operating income growth target.

Okay.

Okay.

And then lastly, Louie, as it relates to the buyback, am I right that if on a local currency basis over the next several years if you don't make acquisitions, the total trailing growth debt to EBITDA will probably take about 1.6 times and then come down slightly?

Am I thinking about that correctly?

Yes, you are.

And so the followup question to that is can't you take it a little bit higher within the existing rating and is there any reason why you should essentially deliver a touch over time?

Well, we think that the $12 billion program strikes the optimal balance, as I said in my remarks, between one thing to reward shareholders and retaining a very strong balance sheet, David.

I just go back to earlier what I said in terms of an uncertain climate going forward.

You know that every time we do have a program we complete it on time and indeed if you are right and we get currency favorability we can see in terms of the program itself with regard to its timing.

But at this stage we actually are very happy with that program over a three-year period.

Great.

Thank you very much.

Good luck.

Thank you, David.

Your next question comes from Judy Hong of Goldman Sachs.

Thanks.

Hi, everyone.

Hello, Judy.

Thanks.

Hi, everyone.

Louie, the decision by some of your competitors to partially absorb the tax increases, how concerned are you about those actions and is there a cause for concern that these actions expand and undermine the positive pricing environment that you see in the marketplace?

I don't think so, Judy.

They're usually temporary skirmishes that we see here and there.

The overall environment (inaudible) what there remains highly competitive is one that I think is relatively favorable, but I think it's inevitable in a highly competitive environment that one company or another in a specific market occasionally tries to take a temporary advantage.

But I think everyone is aware that other players will react quite forcefully if the duration of those excise tax absorptions are too long, and I think we're all aware of that.

So I wouldn't say that it's a concern.

It does however, affect our market share performance in a given quarter over another quarter depending on the market where the skirmish happens.

Okay.

And then just in terms of the market share performance, specifically I guess on Marlboro where you have seen a bit of a decline in the fourth quarter in some of the more EU markets, assuming that the macro comes back and things normalize, how confident are you in terms of Marlboro seeing growth again and shares getting better?

I would say I'm quite confident, Judy.

As you know, there's been a lot of activity on the brand in numerous EU markets in particular.

The emphasis so far has really been on the gold line and we have seen significant improvements in demographics.

Its share as an SKU or a sub brand family has done better than the full flavor variant, especially in the down trading environment.

So it has withstood the down trading more than the parent, if I could call it that.

There's a lot of activity now happening on the parent with the new packaging, the new red packaging which is being rolled out in various markets.

And I'm confident that with the economy recovering that the brand will not only gain share of premium, but will actually start gaining share itself, and Italy is a perfect example where in Italy, Marlboro's share is growing for the full year and the quarter, and the numbers suggest that the momentum is indeed accelerating.

Okay.

And then my last question on Indonesia, it looks like in the fourth quarter you had a pretty nice pickup and I guess some of that is just the timing of the Ramadan shift, but maybe you can just give us some color as to what you think Indonesia could do in 2010?

Obviously it's a market where up until 2009 it was showing pretty healthy volume growth and it slowed a little bit so I'm just wondering whether you see a nice recovery as we look out over the next few quarters there?

You're right.

The fourth quarter volume was up double digit in Indonesia and it was principally driven by the timing of Ramadan which heard our fourth quarter as Hermann had told you at the time.

Share continues to be relatively strong, particularly behind a milder Marlboro.

As we've said in the past, shares somewhat is a bit volatile based on the stick prices and when those stick prices go over certain thresholds.

Total industry shipments in Indonesia were up 5% which is a pretty attractive number and we would anticipate that those consumption levels would continue.

The economy of Indonesia is doing well.

There has been excise tax reform which I believe will be favorable going forward.

Today we are seeing quite a lot of growth in the low-price segment, and if you recall, there is an excise tax benefit for manufacturers that manufacture cigarettes below a certain threshold.

And I think over time, that loophole will be closed and that will be a benefit for us and the bigger players.

Let's not forget there are over more than 700 manufacturers, small manufacturers of products that enjoy these excise tax benefits which clearly potentially help employment, but damage government revenues.

And I think the trend that we've seen in terms of the surge in the volume of that segment will attenuate as the excise tax reforms take place.

What's the timing on the excise tax reform?

There is a plan which I think is a three-year plan and it's already started to be implemented as of January.

Thank you.

You're welcome.

Your next question comes from Adam Spielman of Citigroup.

Good afternoon.

I'd like, if I can, to try and understand how to reconcile your long-term growth targets with what you've achieved in 2009 and what you appear to be likely in 2010?

Because as I understand, what you're saying is that 2010's going to look very much like this last year we've gone through.

Organic volume is supposed to be down a little bit, mix little bit negative but very strong pricing leading to good revenue growth and good OCI growth, and buybacks leading to even better EPS growth.

But is that EPS growth you've achieved 15% in 2009 and you're saying it's going to beat the top end of your long-term guidance range in 2010?

How should I reconcile that apparent contradiction?

Or are your long-term targets just too conservative?

Well, at least having actuals that beat our targets is a good thing, Adam.

That's certainly true.

I'm not complaining.

I see what your concern is.

It is a long-term target.

So far we've done better.

I would say that part of our pricing has also been driven by the need for government revenues and as we take pricing in a lot of markets that have an ad valorem tax, that increases government revenues.

So pricing has been a big driver, as you know, and will continue to be this year.

Whether we'll be able to price indefinitely the way we have, long term, remains a question.

I believe that we can give them the relative pricing of cigarettes versus other products and in a number of places they're relatively cheap still, but I would say that excise task threats, as I mentioned in my remarks, to be realistic, is a risk that always is there, Adam.

We feel very comfortable with the 10 to 12.

If we can do better, so be it.

I'm taking out of that that you think the long-term guidance is pretty conservative and that you've got it where it is because there were some threats, like on excise task which may appears, but they may not.

Yeah.

I wouldn't say that 10% to 12% EPS growth rate long term is an unnecessarily conservative number, but I do say that at the moment with the momentum we have, and we proved it in 2009 and we believe can do it in 2010.

When we say long term it's for the next 10, 15, 20 years, Adam.

Thank you very much.

Thank you.

(Operator Instructions)

Your next question comes from Chris Growe of Stifel Nicolaus.

Hi.

Good afternoon, Louis.

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

I wondered if you could speak to the different tiers of product and premium, mid tier, and low tier, and basically how those performed in 2009?

Was there any material shifting out of premium if you look at the full year or does it get any better in the fourth quarter I guess would be a follow-on question?

The evidence would suggest that certainly we saw an improvement in the fourth quarter in most instances.

An exception to that was Germany where the premium segment actually, the down trading from the premium was aggravated in the fourth quarter.

The two key markets that suffered significant down trading were Germany and Spain and I think however that one has to be very careful because I can give the example about L&M, for example.

People are down trading in the EU to L&M.

Take the Germany example, or in fact, Spain as well, which has been driving a lot of L&M's growth.

What you have to understand is, L&M's average marginal contribution in the European Union is equal to even higher than Marlboro's marginal contribution in Asia, in Latin America, and in the EMA region.

It's something that I think you should be cautious about in terms of discussing premium segments versus mid-price segments because if you look at it globally, whilst there may be down trading from primarily the European Union, it is down trading to a level where the marginal contribution is ahead of the Company average.

Do you understand what I'm trying to say?

Absolutely, it really depends by region.

And I think the same would go, if I'm correct, with the mid-tier category in your Eastern European region as well, right?

Correct.

It's a very profitable region for you, I understand.

Thank you.

So two quick follow ons then, I guess just to kind of get a better sense of kind of looking forward for the EU region, I just want to get a sense of how you're looking at that region and should we expect from a volume standpoint?

Is the underlying negative 3.5 or so this year, is that a good run rate to build in or was that aggravated to your point by economic conditions?

And it should be a little better going forward?

It was certainly aggravated by economic conditions and I would hope that over the mid to longer term it would get better than that.

We did witness an improvement versus 2008 despite the circumstances, but clearly it was dramatically down in Spain and the Baltics, which affected the number you're saying of 3.5%.

You take a market like France, consumption -- or industry shipments was actually up last year, and I think that longer term you would hope that we could do better as an industry than a decline of 3.6% which was the underlying decline that we suffered last year.

Okay, thank you.

I just have one follow on.

I hate to have Hermann not be able to speak today and maybe this is a better question for him, but my question was just if you look at 2009 just looking backwards at your foreign exchange hit in the year, would you be able to give us kind of an update on how much of that was transaction versus translation?

Well, the transaction and translation is always the question how you define it.

Let me answer that way.

We had, when we talked about a year ago, at the prevailing exchange rates at that time we were facing an $0.80 hit on EPS level.

Actual results have come out, better.

Essentially we came out with negative $0.53.

Out of the $0.80, really the big difference or the big hit there was an assumed $0.58 out of the key emerging markets currencies that ended up to be $0.39 in actual results.

So I think the name of the game forward always will be and remains to be not to look at the euro and the yen only, but also at the key emerging markets currency as the ruble, the Indonesia rupee, the Turkish lira, and the Mexican peso.

Thank you.

Your next question comes from Karen Lemark of Federated Investors.

I have a few questions.

Even just in terms if rates have changed based on the first quarter compared to the first nine months of 2009, are you at the point of saying maybe broadly speaking at that we've seen the worst of the down trading unless we see obviously another leg down in the global economy or massive increases in excise taxes?

I would say that that's probably a fair statement.

I think we've probably seen the worst in the principle markets.

As I mentioned in my remarks, the watch out this year are certainly Turkey, Greece, and Japan.

Those are watch outs that we're clearly aware of today.

And Germany, we'll see as the months unfold, but clearly Germany in terms of the premium segment, we are witnessing growth of the value segment and in fact the trade brands have gained about a one share point in the second half in Germany as some of you may be aware.

But generally I would say if I look at the world, the worst is probably behind us.

And then following up on Turkey and Greece and Japan where you called out obviously particular pressures expected, what's sort of in your toolbox for fighting that, whether marketing, whether promoting some of your lower price brands if you choose to do that.

I mean, what do you do in a situation where you are expecting significant pressure because of an external force?

Well, the first tool is to try to convince governments that in abnormal excise tax increases they have to ensure that they have the appropriate structure in place, and then we look at price gaps very carefully.

We know that consumption will decline and therefore other than price gaps we try to take pricing that would offset that volume and we've done so successfully in most markets.

Turkey was an example where they increased the minimum tax, but probably insufficiently in terms of structure, to assure that there wouldn't be down trading.

I mean, we have witnessed retail price increases of 25% to 30% across the board.

That creates a bit of a shock to the system.

In Greece, as I mentioned in my remarks, the tax increases was accompanied somewhat irrationally by a lowering of the minimum tax burden and therefore price gaps are going to widen and down trading will inevitably happen.The strength of our business is that we are in both markets and have a complete portfolio of brands so we feel that shares should be okay.

The issue will be total volume, and clearly mix.

That's very helpful.

And then lastly, under what conditions might you consider a more aggressive dividend payout ratio?

I think you're at 65% formally if I'm not mistaken?

Formally we're at 65%, but we're in fact above 70% in actuality.

We like to retain that formal 65% and Adam probably thinks this is a conservative number because we are ahead of it and we think we will continue to increase our dividends in line with our earnings going forward, but 65% remains our payout ratio and I think the balance between dividends and share repurchases is pretty fair.

We'll see, as the years unfold, whether taxes will change in terms of capital gains and dividends and we'll see whether that requires some sort of rebalancing or not.

We'll see that.

Thanks so much.

Your final question comes from Pam Yuk of Financial Times.

how are you?

Very well, thank you.

Hi.

I just have a couple of questions on the share buyback.

I was just wondering kind of what was the rationale for continuing extending the share buyback program and is it because perhaps you don't see too many acquisition opportunities out there in the market at the moment?

And secondly, how would this affect PMI's ability to make acquisitions should one come along?

Well, we believe we have a strong balance sheet and we will continue to have a strong balance sheet.

That's what I meant about having the optimal balance between rewarding shareholders which is the purpose of the dividend and share repurchase program, but retaining the financial flexibility to go and pursue acquisitions if necessary.

And we believe we have the luxury of being able to do both.

With the new share buyback, how much cash would this leave on PMI's balance sheet?

I'm not quite sure I understand your question.

Just in terms of how much firepower this will give you if one were to include taking into the new share buyback program?

Enough firepower to do what it is we need to do.

Which is?

I don't think I'm prepared to go beyond that, frankly.

As we discussed earlier, you may recall David Adelman mentioned EBITDA to gross debt ratios.

We are comfortable with those ratios in terms of our credit ratings, and if a significant acquisition were to come about, we believe we could pursue it, but at this stage I'm not prepared to give you any numbers or anything and I'm sure you understand why.

Sure.

Sure.

I mean, do you see any kind of acquisition opportunities out there at the moment in the market?

Well, we have a list of projects that we pursue.

Last year we pursued a number of transactions.

We continue to pursue them.

I can't tell you when they will materialize, but certainly we have a list of business development projects that we pursue quite actively.

Okay.

And also, given how cash generative the tobacco sector is, do you think you will be seeing a similar wave of share buybacks being announced by other tobacco companies in the months to come?

I don't know, you'd have to ask them.

I think we have a slightly stronger balance sheet than most of them.

I think you should ask them that question.

Okay.

And also, the share buyback, I mean is it fair to interpret the new share buyback program as a sign of PM's confidence that the pressure the Company has seen during the first three quarters of 2009 are easing, and by "pressure" I mean the down trading trend and just currency headwind?

Yes.

Certainly as we said in our guidance we feel pretty confident in terms of our financial results going forward, and the share repurchase program per say underscores our optimism going forward.

Yes, certainly.

Okay.

So I mean I guess it goes back to the earlier question so you think the worst in down trading and currency headwind is over?

Well, currency remains volatile.

Anybody who projects currency is always a dangerous exercise.

We're very focused on our constant currency growth rates.

Last year we faced a pretty severe currency headwind.

Prevailing rates we get a mild tailwind and we'll see how things develop going forward.

You've seen that the euro has certainly weakened in the last two or three weeks because of the issues particularly all the concerns regarding Greece and Portugal and potentially Spain.

We'll see who things develop going forward.

And are there plans to expand PM's presence in the non-cigarette market?

Because in 2009 we've seen the PM did quite a number of deals and joint ventures in the non-cigarette areas.

Are we going to see more of that in 2010?

In terms of other tobacco products?

Clearly that's an area where it makes sense and where the segment is lucrative we will continue to pursue organic entry or entry through acquisitions just as we've done in the past, yes.

Okay.

When you talk about doing I organically or through acquisition, would that include potentially having a look at Swedish Match?

As you know we have an international joint venture with Swedish Match which we're very pleased with and hopefully this year you will see some signs of activity.

The organization is in place, we're working on the products, and we're very satisfied with our relationship with it which is an exclusive relationship for the international market outside of the US and Scandinavia clearly.

So we have a 50-50 joint venture for smokeless tobacco with Swedish Match for the international market and that's clearly our priority and what we're interested in.

So would you be interested in a closer relationship with Swedish Match?

I mean, potentially do you see â‚€

I know what you're driving at, but out of principle we don't comment, but I think you can read quite a lot into what I just told you.

Thanks, Louie.

That was our final question.

I'll now turn it back to Mr.

Rolli for closing remarks.

Well thank you very much for joining us today.

I just want to remind listening audience that PMI will be presenting at the Consumer Analyst group of New York's conference in Florida on February 17th.

It's an event that will be webcast for those of you not able to attend and we of course will post our presentations to our website.

Again, thank you for joining us and have a good day.

Thank you for participating in today's conference call.

You may now disconnect.