菲利普莫里斯國際 (PM) 2010 Q1 法說會逐字稿

Good day, and welcome to the Philip Morris International first quarter 2010 earnings conference call.

Today's call is scheduled to last about one hour, including remarks by Philip Morris International.

And the question -- I'm sorry, by Philip Morris International management and the question and answer session.

(Operator Instructions) Navia representatives on the call will also be invited to ask questions at the conclusion of the 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 2010 first quarter results.

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

During our call today, we'll be talking about results in the first quarter 2010 and comparing them with the same period in 2009, unless otherwise stated.

References to volumes are for PMI shipments.

Industry volume and 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 companies income, or OC I, for currency, acquisitions, asset impairment and exit costs and adjustments to EPS, 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 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 is my pleasure to introduce Hermann Waldermer, Chief Financial Officer.

Hermann?

Thank you, Nick, and welcome ladies and gentlemen.

I'm pleased to report that we had a very strong financial performance in the first quarter with our our financial results in line with or above our constant currency, mid to long-term annual growth targets, despite some unwelcome developments on the excise tax front.

Cigarette volume in the quarter increased by 0.7% to 204.7 billion units, including 6.1 billion additional units resulting from our business combination with Fortune tobacco in the Philippines.

On an organic basis, volume declined by 2.3%, a very satisfy result in what is still a difficult economic environment in many parts of the word, and we remain confident we can achieve our for cost 1.5% decline in organic volume for 2010 as a whole.

Overall, volume developments in Japan are obviously the biggest unknown element contained in this forecast.

There are four main factors that impact our volume.

The economic environment, consumer behavior, excise taxation and our competitiveness in the marketplace.

Emerging economies in Asia are continuing to grow, and we are seeing an improved outlook in Latin America, particularly in Brazil and Mexico.

We have commodity prices recovering, there are also signs of stabilization in eastern Europe, though this has yet to translate into higher employment levels and improved purchasing power.

Across the EU, however, economic conditions remain difficult.

Premium volume is growing in several emerging markets such as Algeria, Argentina, Indonesia and Mexico.

Consumer down trading is moderating in Russia, and we are cautiously optimistic that the market will stabilize towards the end of the year.

However, price sensitivity remains high across the EU, putting pressure on the premium segment in these markets.

On a global basis, improvements in employment levels will be the key for consumer up trading to resume.

The other element of adult consumer behavior that is impacting industry volume is illicit trade.

While stricter laws and better enforcement have had a positive impact in Canada where a duty paid industry volume was up over 10% in the first quarter, illicit trade remains a significant issue across a wide range of geographies, particularly those which have been subject to large tax-driven price increases.

Excise taxation is of course a key factor influencing industry volume.

Most governments are continuing pursue a policy of reasonable increases as they recognize that this optimizes their long-term revenues and avoids the unintended negative consequences of increased illicit trade and consumer down trading.

Meanwhile, excise tax structures continue to improve on a global basis.

The latest, very important example of this is the new EU excise tax directive, which is premised on gradual tax increases, includes three important structural improvements and provides visibility through 2018.

The increase in the maximum specific to total tax ratio from 55% to 76.5% will allow governments to introduce excise tax systems with a very high specific element.

A gradual reduction in the difference in taxes between fine cut and cigarettes will over time lessen the tax advantage of roll your own and make your own products.

Finally, the removal of the previous cap on minimum excise taxes provides governments with a much stronger fiscal mechanism to limit down trading, which is important in the context of the recent decision of the European Code of Justice not to allow the continuation of the current minimum reference price systems in Austria, France and Ireland.

Nevertheless, there continue to be a few countries which, from time to time, implement unreasonable disruptive increases.

In 2009, we had Brazil and Ukraine.

This year, we have Romania and Turkey where taxes increased by over 30% in general.

Under such circumstances, it is hardly surprising that industry volume in these two markets was down by double digits in the first quarter as consumers turn to cheaper contraband and counterfeit products.

PMI estimates the illicit supplies have doubled to 36% of cigarette consumption in Romania and has recently increased substantially in the eastern part of Turkey.

The Greek government, meanwhile, defied logic by decreasing the minimum excise tax at the same time as it increased the (inaudible) excise tax rate.

We anticipate this will result in consumer down trading as price gaps widen.

Old price product was still extensively available in the first quarter, therefore, the main impact is expected to be felt starting in the second quarter.

Due to such unintended consequences, there appears to be a strong likelihood that government revenue targets in these countries will not be met, and we hope that going forward, these governments will take a more appropriate approach to excise taxation.

Finally we have Japan, where the Parliament has approved the government's proposal to increase excise taxes by an unprecedented 70 yen per pack in October of this year.

As I said earlier, it is very difficult to predict what the impact will be on industry volume.

PMI had obtained permission to increase prices by 20 yen per pack this June.

However, we have now decided not to implement this price move.

The fourth element affecting our volume is of course, our competitiveness, which remains as strong as ever.

We continue to gain share across many key developed and emerging markets, driven by our superior brand portfolio and consumer element innovation.

Boding well for the future, our smoker share among legal age minimum 18 to 24 year old is at least five points higher than our smoker share among legal age to 64 year olds in a wide selection of markets.

Marlboro had a strong performance in the first quarter with total volume down just 0.6% and up by 1.4%, excluding Romania and Turkey.

Asia continues to be the key driver for Marlboro, thanks notably to Japan, Korea and the Philippines.

The brand also performed very well in the Latin America and Canada region with volume and share increases in Argentina and Mexico, only partly offset by the impact of industry volume softness in Brazil.

Marlboro volume increased significantly in north Africa, and we saw an improvement in duty free sales.

Nevertheless, volume was down 1.2% in the EMEA region as a whole, due to the aforementioned tax driven price increases.

Price sensitivity in Germany, with a very difficult economic situation in Spain and the overall industry volume decline negatively impacted Marlboro shipments in the EU region, which were down 6.2%.

It should be highlighted that today, over 60% of the brand's volume is in fact generated outside the EU region.

The strong performance of Marlboro has been driven by the rollout of the new architecture and successful innovative line extensions.

Marlboro Filter Plus in the red line notably achieved a 2.8% market share in the first quarter in Kuwait.

Marlboro Gold Touch in the gold line had a 1.4% share in Italy.

Finally, Marlboro Black Menthol in the fresh line achieved a 1.3% market share in Japan.

Our success with consumer element innovations has provided us with incremental volume and has reinforced the equity of the overall Marlboro franchise.

Marlboro has been complemented by a broad portfolio of leading international and local brands.

In these difficult economic times, our international low price brands has been performing particularly well.

With strong volume growth for Bond Street, Next and Red and White, as well as local brands, such as Delicados in Mexico and Optima in Russia.

So let me now look at our performance on a geographic basis.

In the EU region where the segment continues to be under pressure from the difficult economic environment and high unemployment, PMI obtained an estimated 38.4% market share, down just 0.2 share points whilst Marlboro share declined by 0.3 points to 18%, L&M's share grew by 0.5 points to a record level of 5.7%.

Our strategy of establishing a strong brand at the lower end of the market invest in Europe as we have done successfully elsewhere around the world is clearly working well.

In Japan, our market share grew by 0.3 points in the quarter to 24.2% thanks to the continued growth of Marlboro and the much improved performance of Lark.

Both driven by the success of our product innovation strategy.

In Korea, our strong momentum continued with a market share gain of 3.6 points, led by Marlboro and Parliament.

In the very important Russian market, we achieved a further market share gain of 0.5 percentage points to reach 25.6%, driven by the excellent performance of Bond Street, which is the fastest growing brand in Russia and has captured a disproportionately large share of consumer down trading during the recession.

The market share of above premium Parliament is stable, and the share of mid priced Chesterfield increased during the quarter, an early sign that the down trading trend in Russia is abating.

These developments auger well for the time when Russian consumers are more confident and start to trade up again.

We have also reinforced our industry leadership in several other emerging markets.

Our market share in Ukraine was up 0.4 percentage points to 36.2%.

In Turkey, in spite of the unfavorable impact on the premium segment of the large excise tax driven price increases in January this year, our share resisted well, being down 1.5 points at 40.9%.

In Indonesia, our volume grew by 5.7% as A Mild continued to show tremendous momentum and our overall share remains stable.

In the Philippines, the recently completed transaction with Fortune tobacco provided us with a combined market share of approximately 90% in March, and the integration of the two companies is proceeding very smoothly.

We had a very strong quarter also in the Latin America/Canada region, with further share gains notably in Argentina and Mexico.

Higher prices in nearly all key markets across the world enabled us to obtain strong revenue growth, despite the lower organic volume.

In the first quarter, we achieved the favorable pricing variance of $449 million, including inventory windfalls resulting from the sale of old tax product at new prices in the EMEA region.

Net revenues reached $6.5 billion.

This represents an increase of 16.1% compared to last year and the very robust increase of 6.1%, excluding currency and acquisitions.

Adjusted OCI was $2.8 billion, up 17% over the previous year and 8.6% higher, excluding currency and acquisitions.

Our adjusted OCI margin, excluding the impact of currency, grew by 0.4 points in the quarter to 42.7%, with increases in the EU, EMEA and Latin America and Canada regions.

The reduction in the adjusted OCI margin in the Asia region reflects the inclusion in the quarter of 6.1 billion units in the Philippines resulting from our business combination with FTC which were consolidated and resold with no additional margin.

Going forward on adjusted OCI margins will be impacted by the dillusion effect of this transaction and surprisingly, emerging market OCI margins tend to be lower initially than the PMI average.

However, over time, such transactions enhance the volume and profitability growth potential of PMI.

Our improved adjusted OCI margins take into account higher tobacco leaf costs, which this year are expected to amount to $200 million.

This increase will be largely offset by productivity savings in manufacturing, and overall, we are on track to realize our planned $500 million in productivity and cost savings in 2010 and our three-year cumulative savings of $1.5 billion.

Adjusted diluted EPS reached $0.90 in the first quarter, a significant increase of 21.6% over 2009 and up by a very robust 13.5%, excluding currency.

Our strong business results have fueled a further increase in our operating cash flow, which was 38.3% higher at $2 billion.

Excluding currency, operating cash flow was up by 29.2%.

The growth in our cash flow was driven mainly by higher net earnings, stricter forestalling regulations, most notably in Poland and the initial positive impact on inventory durations of our $750 million to $1 billion three-year working capital improvement program.

We have further leveraged our operating cash flow growth through tight controls on capital expenditures.

As a result, free cash flow increased at the faster rate of 42.3% to $1.8 billion and by 33.2%, excluding currency.

We have also been active on the financing front.

We issued a $1 billion, ten year bond with a 4.5% coupon in March and established a new $2.5 billion bank revolver to replace two facilities that were maturing later this year.

Since the spin, we have issued over $14 billion in well added bonds in three currencies with an attractive average cost of 5.5%.

Our total available bank revolver credit now stands at $5.2 billion, and these facilities remain undrawn.

Our profitability growth momentum, very solid balance sheet and tremendous cash flow have enabled us to establish strong A-2 and A long-term credit ratings, which we intend to maintain, thus insuring continuous access to the tier one commercial paper market.

Our financial strength has enabled us to continue to reward our shareholders well.

During the first quarter, we spent $1.8 billion to purchase an additional 36.1 million shares and had just $257 million left on our current program which will be completed on schedule by the end of this month.

We have announced a new three-year, $12 billion program that will start in May.

Our dividend of $2.32 per share on an annualized basis has presented an attractive yield of 4.5% on April 19.

So let me summarize the first quarter.

We achieved very strong financial results, pricing power remains intact, our superior brand portfolio and successful innovation drove market share gains across a wide range of geographies and we grew our cash flow at a rapid pace.

There were, nevertheless, some road bumps from excise taxation in a few markets, though the global economic environment is showing signs of recovery.

As a consequence, our overall business outlook is also expected to improve during the second half of the year, which should enable us to build further on our good momentum, though the impact of the October Japanese tax increase remains uncertain.

Finally, I'm very pleased to reaffirm today our reported diluted EPS guidance of $3.75 to $3.85, for the full year 2010, reflecting a growth rate of some 16% to 19% off our 2009 EPS of $3.24.

Exchange rates today are more favorable than they were in February.

However, we have decided to maintain our guidance at this stage in the year, reflecting a more cautious stance on Japan in light of recent developments.

Accordingly, our guidance on a constant currency basis represents a reported diluted EPS growth rate of some 10% to 13%.

Thank you.

I will now be pleased to answer any questions you may have.

Thank you, we will now conduct the question and answer portion of the conference.

(Operator Instructions) Thank you.

Your first question comes from David Adelman of Morgan Stanley.

Hi, Hermann.

Morning, David.

Hermann, the reduction in the underlying growth rate target excluding currency for the year, is that solely due to the rollback of the proposed price increase in Japan?

Or are there other factors afoot?

Okay.

Look, I'm in the first and most important statement to here to make, I believe, is that our underlying business fundamentals remains strong.

Just look at our Q1 results.

I think they are a testament to that statement or that fact.

The second point really is that currency is more favorable now, and we decided not to reflect that favorability in an increase of the guidance because we took a more cautious stance on Japan overall.

So I wouldn't link it to this June event only.

It is just, look, we are five months ahead now of the October 1 tax increase and at this point in time, there are kind of only two things that we really know and more things that we actually don't know at this point in time.

So what we know is yes, there will be this excise increase on October 1 and the roll over on the margin neutral basis is 82 yen per pack.

That we know.

The second thing we really know is that we have decided not to implement the previously approved 20 yen per pack price increase in June, but what we don't know is then the consumer reaction we will see in the market, the price elasticity.

Just in Q1 without any price whatsoever, volumes were down in the market by 4.5% about,we don't know what the trade loading patterns are going to be, what the competitive situation will be and therefore, what our final pricing decision will be, which we haven't made yet.

Okay.

But outside of Japan on a local currency basis in totality, is the business more or less tracking to plan?

Yes, that was my statement number one.

We have really, of course, I mean, you have a couple of excise developments.

We all have heard about Turkey or Greece or Romania, and we know that the situation remains difficult to start from an economic point of view in Spain.

But there are also other elements like a slowdown of the down trading in Russia, continued good momentum in Indonesia, so then we come back to really a worldwide business and the balancing effects of a worldwide business.

Okay, and then just a quick second question, Hermann.

1.8 billion in buybacks for the first quarter, is the plan for the year still just to do $4 billion?

In the range of $4 billion.

Yes, that has not changed.

Okay.

Thank you.

Welcome.

Your next question comes from Chris Growe of Stifel Nicolaus.

Good morning, Hermann.

Morning, Chris.

I have -- just to be clear on your volume assumption for the year, the negative 1.5% organic decline, would that include Japan in that figure?

Whatever may happen around the tax increase?

I would say that contains a kind of the middle of the road assumption for Japan.

But as I said in my remarks, Japan is, of course, the biggest uncertainty in that forecast.

Sure, okay.

And I have just two other questions related to pricing.

First would be that, and if you said this, forgive me, I may have missed it.

But you said last quarter you took roughly two-thirds of the price you needed for the year.

Could you update us on where you stand in terms of the price increases you have taken and any need for your guidance for the year?

Yes, okay.

Look, we all know that price increases, they tend to happen more towards the beginning of the year, because this is when governments also make their budgets.

So that number, of course, has further increased.

I don't have the precise number here.

Will be in the neighborhood of 70% by now.

Okay, got you.

Then the other question I have was just to be clear on how the accounting worked around in the EMEA region where you had that big benefit from pricing, you mentioned something in your prepared remarks about that.

I just was curious, does that reverse in Q2 I guess?

No, it is not a reversal.

It is a one time benefit which is shown in the pricing variance.

Okay, and that is the benefit from selling at new prices in advance of tax increases?

Is that correct?

That's correct yes.

Okay, got you.

Alright, that's great.

Thanks a lot.

Welcome.

Your next question comes from Judy Hong of Goldman Sachs.

Hi, Hermann.

Hi, Judy.

Hermann, just in the Asia region, the margin declines, you talked about the impact from the acquisition.

But the profit was also down year-over-year and I'm just trying to understand what really happened outside of the acquisition impact.

Well, as always a little bit of inventory movement.

The shipment changes on the Japanese market always play a role there.

There is nothing underlying or on the fundamentals wrong.

The impact really there is the unusual unique thing, one time thing is those 6 billion volumes in the Philippines where essentially the margins on those volumes had been taken on FTC level before the business combination, before the transaction.

That is why when you consolidate them in and you resell them to the trade, you have no additional margin.

That is a one time effect there.

So you get the benefit of the volume and the revenues, but you really don't get the benefit of the profit.

And you are saying this is one quarter impact?

This is only, this time one time impact, which has to do with the -- around the acquisition that is part of the -- sorry wrong -- around the transaction of the acquisition around the transaction.

It is a one time impact that you see that way on the consolidated numbers.

But that is not going to be repeated.

So the only other thing which, of course, you will continuously have is overall, emerging markets margins tend to bring down OC I margins initially, because these markets tend to have lower margins than the average.

But that is usually an initial effect only.

Okay.

And can you quantify that impact in the quarter?

If you would take that out, then you would be down to 1.7.

Margin would be down 1.7?

Yes.

Yes, okay, alright.

Then Hermann, just in terms of the markets like Romania and Turkey where you have seen pretty sizable tax increases and obviously the impact on demand, the magnitude of the decline, particularly in Romania, just seems very large.

Can you just talk about maybe the illicit trade, and when can we see that trend improving?

Or the government really looking to crack down more aggressively?

What are you guys doing to sort of mitigate that issue?

Is it it just takes time for that issue to just get resolved and we are just going to have to deal with this for the next few quarters?

Look, Romania, unfortunately is an example of how not to do it from a government perspective.

There were several price increases, tax increases already in the market.

April, September of last year, again January this year.

Now, illicit trade has literally exploded, doubled from before.

18% to 36% now.

To crack down on this is much more difficult than to take a reasonable decision beforehand.

So of course, we try to help.

But the real help would be there to come back on decisions, which rarely happens in markets, I must say.

So yes, it has driven prices in Romania to a point where the average Romanian lei, average net income in Romania is anything between 1,400 and 1,500 Romanian leis, and a pack of cigarettes is in the range of 10 leis.

I think that tells you everything, that it's just -- it just went beyond.

The government took it too far and that is what we are faced by now.

They will, of course, not meet their revenue targets.

I hope that it will come to a more normal situation, but I don't give you a short-term hope for that.

Okay.

And then finally Hermann, just in terms of Marlboro's performance in the quarter, looks like the volume decline has actually moderated even though your overall organic volume continues to be challenging.

So is it fair to say that a lot of the improvement is starting to really show up in more markets as you have gone through these brand architecture initiatives and maybe some of the markets where you are actually seeing better trends more recently versus the last few quarters, can you talk about some of those markets?

Look, it is obvious that in difficult economic times, it is more difficult for a premium brand than it is for a low priced brand.

So therefore, in that environment, I think the market performances are very, very good performance, and there are so many examples around the world.

We talked about it in the script before, in Asia and Latin America where the growth is, actually, even if you then look a little closer into Europe, this is not an EU problem either, because there are a number of important markets in the EU.

Now Marlboro is doing pretty well with as well with substantial increases in share like Italy, (inaudible), Poland, also the Netherlands would be good examples.

Then if you really looked into where we have share declines, then there are specific reasons.

Germany is really a very price sensitive market that you can recognize that from the growth of trade brands, renewed of growth of trade brands in the market.

What did we do about it?

Well, we have established now L&M at the low end of the market, and it's doing extremely well and almost compensating the losses there.

So that's what you can do in such an environment.

Or you go to France, there actually we have a second premium brand, which is almost picking up the share losses that we make on Marlboro, which is Philip Morris Filter Kings.

And then you have two others in Greece and Spain where the declines are simply linked to the economic situation.

So there are specific problems here and there.

But if you take it all together, I see many more positive signs around the world than problems and with the problems you have to deal.

Okay, thanks, Hermann.

Welcome.

Your next question comes from Jon Leinster of UBS.

Good morning, Hermann.

Good morning.

Just a company of things.

First of all, can you actually quantify that inventory gain that you took in the EMEA region?

No I wouldn't go to a specific number here.

It was a sizable number, it is by the highlighted in our remarks, but I wouldn't want to quantify.

Okay.

Secondly, in terms of western Europe, there's obviously been some quite significant price increases in many of the major markets in recent times, particularly obviously Spain, some in France and Germany.

I think given the ongoing unfavorable economic conditions and indeed, in some of those markets as you say continuing to down trade, is that likely to be the ongoing policy?

Or would you expect it to moderate a bit?

Well that forward-looking pricing I will not comment.

There is only one thing out there which is a fact, that as everybody knows, VAT goes up by two percentage points in Spain in July.

Okay, and just in terms of going back to the previous question.

How far is the new Marlboro architecture actually being imposed in those western European markets?

Has it now been fully introduced?

It is not being imposed.

It is implemented as appropriate on a market by market basis.

Look, in the European markets we are pretty well advanced on a worldwide basis.

There is a lot more to come.

And I would even go that far to say look, it's not a program that has just to be worked down and then we are done with it.

New Marlboro architecture innovation is an ongoing thing.

It is about having a pipeline always ready that kind of brings you into the next three years, and that is what we will continue to do.

Okay, and lastly, am I right in saying that there is no particular rules against trade loading in Japan?

Or is there any rules stopping retailers from loading up ahead of that tax increase?

No, there is no such rule yet.

There is just no excise tax advantage in the Japanese market.

But the retailers, yes, can load more if they want to.

Thanks.

You are welcome.

Your next question comes from Thilo Wrede of Credit Suisse.

Good morning, Hermann.

Good morning, Thilo.

Quick follow-up question on Japan and the impact the market has on your currency neutral EPS growth guidance.

Should we read from the reduction of the growth guidance that you are now less confident that you will get a good enough price increase in October to offset the volume impact from the tax increase?

Well, as I said before, I don't know what the situation is going to be.

We have not made our passing decision yet.

It is just we felt that at this point in time, five months ahead of that date, it is prudent and wise to take a cautious stance.

But why have you gotten more cautious on your ability to take pricing in Japan since February when you confirmed the guidance at Cagney?

Look, we had a sequence of events in the Japanese market as well.

We initially decided to increase our prices by 20 yen in June.

As we all know, you have to go through an approval process with the Japanese government there, and we did that, and we got it proved.

And then thereafter we found ourselves in a fairly uncompetitive situation as other companies had made different decisions.

So our final decision in this case was to give priority to volume in market share over profitability.

Which is a departure from your usual approach, right?

My impression has always been that you prefer to take pricing over volume growth, isn't that correct?

No, it is actually perfectly in line with our approach when we make pricing decisions for any market around the world, and we will look at the level of the excise tax or the increase of thereof.

We will look at the excise structure or the change of that structure, we will look at government revenue expectations.

We will look at overall affordability, expected price elasticity or consumer reaction, and we will make an assessment of the competitive situation.

And after having done all that, we will make a pricing decision.

That is valid for Japan like it is for any other market.

Okay, and one completely unrelated question, I was a little bit surprised by the low cash balance that you showed, especially given the strong free cash flow that you had.

Can you help me understand what happens below the operating cash flow line?

Why cash is so low?

No, there is nothing specific in there.

This is timings on a day by day basis.

It is a little lower than we typically run, but these are normal fluctuations, there's nothing specific there.

Thank you.

Okay, welcome.

Next question comes from Chris Farkas of Bank of America Merrill Lynch.

Thank you very much.

Good morning, Hermann.

Hello, Christine.

I just -- as a broad question, I think every quarter every year you talk about the potential for pricing to be more difficult or the ability to take pricing to be more difficult.

Your price variance is still pretty stable at $449 million as you have indicated.

I'm wondering, do you still feel the same way?

Are you still comfortable with your ability to take pricing at this rate?

And then I have a follow-up.

Well, I can't talk about the future in terms of amounts, because we will see what the future brings.

But I can answer your question that way.

That our pricing power, I believe, has remained intact.

And there is nothing, aside from some country variables, clearly, that are difficult to predict?

There is nothing structurally, again, changing your view of your ability to take pricing?

No, structurally it is principally -- it's excise tax structures and therefore, in this area of excise structures, I actually see continuous improvement, despite some unpleasant developments that we have discussed earlier.

Okay, and then just a follow-up on the Philippines.

You talked about the one time impact from the benefit of getting volumes and revenue and not profits on the merger.

Was that a one time impact for the quarter?

Or for the full year, will we see that margin pressure from that transaction?

No, it was a one time in the quarter.

In the quarter.

Thank you very much, Hermann.

You are welcome.

Your next question comes from Ann Gurkin of Davenport.

Good morning, Hermann.

Good morning.

As markets are improving, are you finding consumers are trading back to premiere brands?

Is that movement in line with expectations?

Look, to start with, we all know it's not a, it has never been a phenomenon around the world.

Let me pick, therefore, the most important market really in that context, which is Russia.

And there, just a couple of things, when I look at our distributor, extra distributor sales in the market in the first quarter, then I see that premium volumes are still down 12, but no longer 13, 13.5 like they were in the fourth quarter.

The growth in the value and below is about 11, but it was 16%, 17% in Q4.

A look at our Nielsen market shares.

I see that Parliament brand is flat at about 2.9% market share.

I see a high mid priced brand, Chesterfield, that is picking up share of 0.3% to 3.3% of the market.

So these are good signs there, that things begin to improve.

So it is signs of recovery.

It isn't recovery, yet, it is not up trading yet, but the day will come.

So up trading, therefore, is not a question of if, it's a question of when in this important market.

Right, and then secondly, just on raw material costs, any change in costs?

No, no surprises.

What I said about leaf is what I had communicated also earlier, so no real big surprises there.

Great.

Thank you.

You are welcome.

Your next question comes from Adam Spielman of Citigroup.

Hi, Hermann.

Can I ask you a question about Russia, first of all?

Are you able to give your revenue market share and how that's progressed over the last few courses?

Well, I don't have the revenue share here, or I don't know it by heart.

But the revenue share, of course, is clearly higher than our market share.

But the question is, is it improving?

I suppose the question behind the question is you are doing very well with low priced brands like Optima and Bond Street, and I was wondering whether -- what impact that is having on your mix in the market relative to the market as a whole.

Look, overall, of course over this time, the share of premium in that market has come down, and the share of low has gone up.

That is not a surprise.

Being able in such a context to increase your market share means that you do have international and local brands at the lower end of the market, which enable you to capture these down traders and actually, in particular, Bond Street has been doing extremely well in attracting those smokers.

So, it is the benefit of a complete portfolio that you see in Russia, but that this is a certain effect is clear.

But, at the end of the day in dollars, the margin is flat.

Thank you.

Turning to the more broader EEMA region, is it fair to say that the source of price mix you would have got without the one time gain from the tax issue would have been roughly similar to what you might have got, let's say, in the fourth quarter?

In terms of price mix?

Without the windfall?

Should be pretty similar.

Yes, it should be pretty similar, yes.

Absolutely.

Thank you very much.

And just finally, geographically, which markets did that occur in?

This gain?

Now look, now we go to market profitability.

I'm sorry, I can't.

No, no, no.

But surely you can say the main impact was in Turkey or the main impact was in -- I'm not looking for profit by market.

I'm just trying to understand where this thing happened.

Yes, look, the big markets in the EMEA region are Russia, the Ukraine, Turkey, the Middle East and GCC.

Okay.

Thank you.

Thank you very much.

You are welcome.

Our final question comes from Thomas Russo of Gardner, Russo, Gardner.

Hi Hermann.

Good morning.

Good morning.

Good move on responding to the Japanese market quirky developments.

I'm pleased to hear what you have done.

A question in Russia, you mentioned at the start of the downturn two years ago that you were well prepared because you had a full price tier, and you thought you would travel up and down with the consumer.

And I'm wondering, in the other markets of EMEA that we just cited in Adam's question, did you also have a full price tier?

And what was it about those markets that maybe didn't -- maybe did not allow to you travel up and down with the consumer as well as you did in Russia?

Well let's go to the neighboring market there.

Let's go straight to Ukraine then.

The situation there is actually similar in terms of market share gain.

We did achieve market share gains in the Ukraine as well.

However, the market actually has behaved differently.

The market has been contracting, driven by a series of excise and price increases, but actually contracting, more or less, on an equal basis.

So if you look at Q1, total market, actually then the premium and the low of the total market I'm talking now, is pretty much the same.

And you have a little bit of a change between mid and value, just below mid.

So pretty stable segments.

In that sense, it is different.

But did we have the brands to keep up our market shares or in other markets?

The answer is yes.

Or go to another one you like, Turkey very recently and right now actually, we have Lark in place at the lower end of the market, which is doing extremely well in a difficult environment for premium brands like Marlboro or Parliament.

Thank you.

Thank you, Hermann.

And then Hermann, in Poland, you had this remarkable in switching effect that took place and drove the market up 4% and Marlboro up 11%.

What markets would you say have the chance, if governments get it right, to have the same kind of in switching lift?

Is there anything that stands out for you in that regard?

Well in Poland, yes, they have really made tremendous improvement on regulation in that area or on the excise tax system there.

They closed, really a loophole that they had in there, and that causes this back switching in to the cigarette market.

If you look at EU total, because that is pretty much happening in the EU, to start with, then this is only going to be gradual and is going to be gradual along the changes that you have seen in the new excise tax directive, which does increase over time roll your own taxes.

Actually, another important market where you see back switching in a different form that we are really happy about it would be Canada.

The people switch back from illegal trade into the regular cigarette market.

I see.

Then last question, you mention in the Fortune tobacco company, consolidation in Philippines, that you will enjoy cost synergies.

Any look toward revenue synergies that might come about from consolidating your respective shares?

And then talk just a second about how -- what the Fortune tobacco corporation's business looked like in terms of its position to the consumer and how that will work for you.

Last thing is to think about India in the same context as what you will extract from the Philippines, since you'll have a chance to possibly partner in India and then develop that market in the way like what you might see in the Philippines.

Okay.

In the Philippines, really, I mean the transaction, our combination of the two businesses, that has really just started.

I think our guys are doing a tremendous job and the guys from FDC do a tremendous job there to being together now.

We have got to give them some time.

The brands and the portfolios are complimentary.

I think we can learn from each other in sales and distribution.

We can look at manufacturing, so the focus for now really isn't all that for the rest.

Let's wait and see.

On India, really, the thing is, you have seen that there are further restrictions actually on foreign investment that have come up in India very recently.

These actually should not have an impact on our business.

We have established last year a new business structure in India, that has laid the foundation for organic volume growth in that market.

So we have an entity we control, which is the -- is holding the license for the international brands, then the manufacturing, and the distribution is happening.

We go through Philips so we don't manufacture in India to start with, so we are not hit by that new regulation.

I think we have a good structure in place, but to translate the Phillipine model into India is not too well because of Indian regulations.

Thank you very much, Hermann.

You are welcome.

Thank you, this concludes the question and answer portion of today's call.

I will now turn the conference back over to Mr.

Rollli for any closing remarks.

Well, thank you for joining us.

That concludes our call today.

If you have any follow-up questions, please contact the investor relations team in Lausanne , Switzerland.

The telephone number is posted on our press release that was issued earlier today.

Thank you again.

Have a great day.

Thank you.

This concludes your conference, you may