菲利普莫里斯國際 (PM) 2010 Q4 法說會逐字稿

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

Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and a question and answer session.

(Operator Instructions) Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community.I will now turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications.

Welcome.

Thank you for joining us.

Earlier today we issued a news release containing detailed information on our 2010 full year and fourth quarter results.

You may access the release on our website at www.pmi.com.During our call today we will be talking about results for the full year or fourth quarter of 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, which for the purposes of this presentation also include our business combination with Fortune Tobacco Corporation in the Philippines.

Net revenues exclude excise taxes.

Operating Company Income is defined as operating income before general corporate expenses and the amortization of intangibles.

You will 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, free cash flow calculations, and adjustments to earnings per share, or 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.

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

Louis?

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

With much of the developed world still grappling with stubbornly high unemployment levels, debilitatingly heavy debt burdens, and bleak budget deficits, we posted what I would characterize as a solid financial performance in 2010.

Unprecedented excise tax hikes affecting 6 markets in particular, coupled with continued economic uncertainty, spurred double-digit declines in industry volumes, further consumer down trading, a more pronounced path of heightened price competition, and a surge in the incidence of elicit trade in those countries.

Regretfully, these factors adversely affected our organic volume performance.

However, despite these challenges, we posted robust increases in our earnings per share and cash flow.

Importantly, we outperformed our international competitors in terms of organic volume and market share growth.

The strategic highlight of the year was the highly promising transaction with Fortune Tobacco in the Philippines.

This not only widened our share leadership in Asia, but I am sure will be a source of solid income growth for years to come.

Our cigarette volume rose 4.1% in 2010, to reach a level of nearly 900 billion units.

Absent the creation of PMFTC in the Philippines, our organic volume fell short of the prior year by 2.5%.

The shortfall is virtually entirely attributable to significant declines in industry volumes affecting Greece, Japan, Pakistan, Spain, Turkey, and Ukraine.

Indeed, absent these 6 markets, which collectively suffered a volume erosion of some 14%, our volume performance in all other markets, representing close to 80% of our volume base grew at an organic rate of 1%.

While the headline organic volume number in the fourth quarter points to a deterioration in our performance relative to the full year, this was entirely attributable to Japan and Ukraine, which suffered volume shortfalls of 43% and 35%, respectively.

Absent these two markets, our fourth quarter organic volume performance was essentially equal to that of the full year.

Our market share performance, despite the challenges we face, was solid.

Indeed, our total worldwide share, excluding China and the USA, but including the business combination with Fortune Tobacco on a pro forma basis, rose to 27.9% for the full year, and 28.1% in the fourth quarter.

We grew share in both OECD and non-OECD markets, while exhibiting sequential improvements, and hence momentum, in both geographies.

We also grew share in our 30 most profitable markets.

While our aggregate share performance was solid and broad-based, we did suffer erosion in several markets, notably in Germany, Greece, Turkey, and Ukraine.

Steps have recently been taken or are planned in all four markets to address these shortcomings.

Marlboro share momentum improved as the year unfolded, despite the challenging economic environment.

This is testament to the success and continued disciplined deployment of the brand's new architecture.

In virtually all instances, we are witnessing improvements in the brand's key image attributes and demographic profile, particularly in regards to the Gold Pillar.

Marlboro's performance in Asia was singularly robust behind the continued success of several entries, focused on the fresh pillar, such as Black Menthol and Ice Blast.

Marlboro's momentum is confirmed by its 6 month movering share trend shown on the chart.

L&M remains a two-pronged story.

It continues to grow and is highly successful in the European Union region, but also continues to shed volume and share in Eastern Europe, and particularly in Russia.

Plans are in place to strive to correct this.

Net revenues of $27.2 billion were up 8.7% for the full year, and 4.8% for the quarter.

While on an organic basis, that is excluding the impact of currency and acquisitions, they rose 3.4% and 2.8%, respectively.

This fell short of our mid to long-term objective, reflecting the volume and mix erosion in the previously mentioned countries.

Due to the abnormal excise tax increases that adversely affected each of them.

Adjusted Operating Company's Income of $11.5 billion rose 10.3% for the full year and 12.2% for the quarter.

On an organic basis, the increase was 5.8% for the full year, and a robust 9.9% in the fourth quarter.

Not surprisingly, pricing was the key driver of our income growth with a particularly strong delivery in the fourth quarter.

Our full year pricing variance approached $1.7 billion, of which close to 600 million, or 35% was recorded in the fourth quarter.

I trust that these numbers will reinforce the belief that our pricing power, despite a very challenging economic environment remains intact.

I should highlight that the fourth quarter pricing variance was flattered by the price increase we obtained on the inventory held by our Japanese distributor on October 1.

This accounted for approximately 20% of the total pricing variance in the quarter.

We're very pleased with the progress across all regions of our adjusted operating margins, excluding currency and acquisitions.

For the full year on a worldwide basis, they reached 42.6%, up 0.9 points.

This reflects both our strong pricing and our continued efforts to generate productivity gains and cost savings, as we completed our 3 year, $1.5 billion program.

Our earnings per share performance was singularly robust, exceeding our mid to long-term target for the third year in succession.

Adjusted diluted earnings per share of $3.87 for the full year and $0.97 for the quarter rose 17.6% and 19.8%, respectively.

Excluding the favorable impact of currency of $0.12 for the year and $0.01 for the quarter, earnings per share rose 14% in 2010 and 18.5% in the fourth quarter.

As strong as our earnings per share performance was, it was surpassed by that of our cash flow.

Indeed, our free cash flow rose by some $1.6 billion, or 21.7% on a currency neutral basis, to a record level of $8.7 billion.

This performance was due in large part to the strict management of our working capital, and in particular, a reduction in our receivables and inventories, reflecting our efforts to optimize our supply chain.

Our ability to generate strong and predictable cash flows is a hallmark of our Company, you may recall that at the time of our spin-off in March 2008, we set a three-year cumulative operating cash flow target of $21.7 billion.

Fast forward to today, and we have handsomely exceeded that target by $3.5 billion, or 16% to reach a cumulative operating cash flow of $25.2 billion dollars and this, despite an adverse currency impact of some $500 million.

Our strong and growing cash flow has underpinned our ability to reward our shareholders through higher dividends and our share repurchase programs.

We have increased our dividends by a cumulative total of 39.1% since the spin, and by the end of December 2010, had repurchased 334 million shares, or 15.8% of the shares outstanding at the time of the spin, at an average price of $47.83.

While I cannot deny that 2010 was a tough year in many respects, we were able to overcome most of the significant roadblocks that were erected in our path.

Our earnings per share and cash flow results were quite exceptional, given the economic challenges that have yet to be profoundly resolved, primarily in the Western world.

It is against this fragile economic backdrop that we look to 2011.

As disclosed in our earnings statement released this morning, we project another strong year in our key financial metrics, with a reported diluted earnings per share guidance falling within a range of $4.35 to $4.45, versus $3.92 in 2010.

On an adjusted basis compared to $3.87 in 2010, this corresponds to an increase of approximately 12.5% to 15% at prevailing exchange rates and approximately 10% to 12.5% on a constant currency basis.

We believe that our guidance appropriately reflects a cautious balance of the risks and opportunities that always accompany any projections made this early in the year.

I should also highlight that this guidance assumes an underlying effective tax rate that is expected to be some 70 basis points higher than that incurred in 2010.

The key risks to our earnings projection is a potential for disruptive excise tax increases, and adverse movements in the structure thereof, as we painfully witnessed in 2010.

While last year we faced an unprecedented number of countries that turned to tobacco to generate additional revenues by raising excise taxes to levels that went beyond any reasonable expectation.

So far this year, the news on excise taxes is, with one key exception, relatively benign.

The one exception is, of course, Mexico, where the average excise tax burden was increased on January 1 by 50% in one fell swoop.

Elsewhere, other than the adverse impact of the annualization of 2010 increases, the excise tax increases that have been announced appear to be manageable.

Furthermore, and very importantly, we have witnessed a number of encouraging structural changes driven in large measure by the new excise tax directives in the European Union.

Indeed, France, the Netherlands, Sweden, have all increased their specific-to-total tax ratios and Greece has significantly improved its tax structure.

In addition, in Germany, we have a new tax law that provides for reasonable increases and visibility over a 5 year period.

Unemployment remains persistently high in numerous countries and continues to affect both industry volumes and mix.

In addition, inflation, particularly as it relates to basic food commodities, remains a concern relative to consumer discretionary income levels in numerous markets.

Furthermore, recent events in North Africa are likely to impact our performance, and we can only hope that this will be a temporary phenomenon.

In light of these dynamics, we expect our organic volume performance to mirror that recorded in 2010.

Japan and Mexico will dampen our volume prospects in 2011, and given the economic uncertainty, we continue to project volume softness in Greece, Pakistan, Spain, and Ukraine.

Also, we project a slightly weaker volume trend in both France and Italy, reflecting retail price increases ahead of inflation.

Elsewhere, we anticipate a solid volume performance led by Indonesia, Korea, and Russia, as well as a projected recovery in Turkey.

The ultimate volume impact of the tax driven price increase in Japan remains the single largest question mark.

It will also affect our quarterly volume performance in a significant manner, with pronounced weakness in the first half and gradual, but consistent improvement in the second half.

While it is too early to gorge precise volume trends, January sales were modestly better than we had originally anticipated.

And accordingly, the assumptions for Japan, on which our earnings guidance is predicated, may prove to be somewhat overly cautious.

Given our share momentum and the initiatives we have planned, we anticipate another year of solid market share performance.

Persistently high unemployment levels will continue to exert pressure on the premium segment in some markets, but we believe that in most instances, we could more than offset this dynamic, given the breadth of our brand portfolio.

Pricing will continue to be the key driver of our income growth.

We project a price variance exceeding that recorded in 2010, driven in part by the price increase in Japan.

Indeed, more than 60% of the pricing embedded in our 2011 guidance has already been announced or implemented.

We anticipate some cost pressure, driven in large measure by the historical leaf tobacco price increases that will continue to affect our product costs in 2011.

The more expensive materials and packaging associated with the Marlboro architecture and other premium brand offerings, as well as the costs associated with the implementation of reduced cigarette ignition propensity rules in the European Union in the fourth quarter.

We will implement a number of productivity and cost reduction initiatives during the year and we have set a target of pre tax cost savings of $250 million in 2011.

Finally, we anticipate another strong cash flow performance and share repurchases of $5 billion in 2011, in line with the level dispersed in 2010.

All in all, 2010 proved to be a difficult year, but we posted results that compared very favorably to our consumer product peers.

We entered 2011 with clear momentum and exciting plans.

The so called two-speed recovery remains fragile, but we look forward to the year with cautious optimism.

There is likely to be continued volatility in currency markets and other uncertainties, but we have the human and financial resources, as well as numerous planned initiatives to sustain our momentum and post another year of solid growth.

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

Thank you, we will now conduct the question-and-answer portion of the conference.(OPERATOR INSTRUCTIONS) Judy Hong, Goldman Sachs.

Thanks.

Good afternoon.

Good afternoon, Judy.

Just first question related to the 2011 organic volume outlook.

It looks like you're looking for the decline to really no longer moderate versus a couple months ago you were thinking that maybe volume decline could moderate as you look out 2011.

So, I'm just wondering what's really changed in terms of volume outlook now being a little bit softer than 2 months ago?

Not much I can add to what I said in my remarks, Judy.

The economic recovery is somewhat uncertain still.

Unemployment remains persistently high in a lot of places.

You know, North Africa recently has been an issue for us.

Tunisia is now essentially back to normal, but Egypt obviously things are essentially at a standstill at the moment.

Japan volume, as I said in my remarks, that could be a potential upside, but frankly, it's too early to say that today.

What are you assuming in Japan, just to clarify?

We're essentially consistent with what we've said all along, which is on an annualized basis as of October 1, we see volume decline of about 20%.

Now, as I said, the quarterly, the quarterly volume shifts will be quite significant.

I mean, we'll see a weak first quarter, a very weak second quarter, because of a difficult comparison.

Third quarter should be okay, and the fourth quarter should obviously be very strong in terms of volume.

Okay.

And then in terms of the profitability impact, because I look at the Asia region in the fourth quarter, you obviously had a very strong growth.

Some of that was the revaluation of the inventory in Japan at higher prices, but even if you exclude that, you had a pretty healthy operating profit growth.

Presumably, because you've seen the benefit of the pricing in that market and even with the volume down 40% plus in Japan.

So, if we assumed that volume decline is about 20% for 2011 in Japan, wouldn't the profitability, or profit growth impact in 2011 be much better than what you actually saw in fourth quarter?

In terms of Japan itself?

Well, I think I'm just trying to understand what happened in the fourth quarter from an Asia region profit growth perspective, and then trying to understand how that impacts 2011, if we assume Japan's down 20% or so.

Well, let's go through it.

Yes, Japan was flatted by the pricing on the inventory.

And the pricing of the small amount of volume that we actually shipped.

However, that was essentially a wash with the volume hit in the fourth quarter.

So, what you're seeing in Asia is a very strong performance in a lot of other markets, principally driven by Indonesia, the Philippines, Korea, and various other markets.

I mean, Asia is doing extremely well and will continue to do well.

Okay.

And then just in terms of share buyback, it seems like you're accelerating the pace of the buyback a bit here.

I'm just wondering if you can just speak to whether at this point you could look -- be looking at finishing the current program sooner, and then is that a factor in terms of the tax rate going up in 2012?

Sorry, 2011?

No, it has nothing to do with the tax, per se.

But listen, we had a $12 billion 3 year program, which annualized, it should be $4 billion a year.

We met our working capital objective well ahead of plan, and therefore we decided already last year to increase our share repurchases from $4 billion to $5 billion.

And this year, we believe that given our earnings prospects and cash flow prospects, we can also repeat that performance and go for $5 billion.

I think it's consistent with our views that we should reward shareholders, both in terms of dividends and share repurchases, to the extent that we can.

And as our results come in strong, that's what we're going to do.

Okay, thanks.

David Adelman, Morgan Stanley.

Good afternoon.

David, good afternoon.

Louis, just as a follow-up in Asia, have you implemented any price increases in the Philippines since the business combination closed?

Yes, we have.

Okay.

We increased prices last August and we just increased prices again.

Okay.

Secondly, although it's a very long-tail dynamic, are there any milestones you hope to hit that you could call out during 2011, either with respect to the Chinese joint ventures or your efforts with respect to a reduced risk product?

In terms of 2011, that's possibly early, David.

Our relations with CNTC in China continue to be excellent.

The joint venture brands are doing well.

Marlboro, although very small, continues to grow in China.

There have been great efforts on the part of CNTC to enhance distribution throughout China.

And I think the relation is -- the relationship is excellent and consistently improves.

But as I've said all along, it's going to take some time and I don't think there are specific milestones in 2011.

Now, in terms of next generation products, we have and continue to make progress and we will be taking certain initiatives this year, but to come out with specific milestones this year is a bit early still, David.

And as you know, I have always linked the two together.

I think a material entry into China is somewhat dependent on the existence of next generation products.

Okay, Louis.

And then lastly, can you give us a general sense in the four markets you called out where you're not pleased with the -- your market share performance, the types of tactics that you tend -- intend to employ?

Well, yes, let's go one by one.

As you're probably aware in Germany, where Marlboro has suffered, partially offset by the continued growth of L&M, which is the fastest growing brand in Germany, and has probably -- not probably, has the best demographic age profile today followed by Marlboro.

A lot of the market has shifted to what are called Big Packs and Maxi Packs.

So, Big packs are 25, 24, 25 cigarettes a pack versus the traditional 19s.

And there's been a proliferation of now Maxi Packs, which are 28 cigarettes or 29 cigarettes a pack.

Those Big Packs and Maxi Packs sell at a considerable discount to conventional packaging of 19 cigarettes.

Marlboro was at a competitive disadvantage because we were somewhat slow to react, with the Maxi Pack, in particular.

So, in the fourth quarter, we launched the Marlboro Maxi Pack.

It does not offer the same discount as its competitors, but still does offer some discount.

And we actually saw an improvement in Marlboro's performance in the fourth quarter.

So, that will continue.

The other thing to note is that, as I mentioned in my remarks, we now have visibility on excise taxes.

There's an excise tax increase due for May 1.

The structure is pretty good at the low end.

The tax pass-on is EUR0.13 a pack.

At the premium end, it's EUR0.04 a pack.

So, that's pretty good news.

So, Germany, L&M is in great shape.

Marlboro's now competitive with the advent of Maxi Packs and let's see how things proceed.

In Turkey, we were at a significant price disadvantage, because we led prices at the time of the tax increase, which you may recall was significant, and not everybody followed to the extent that we had led.

That put us at pretty significant competitive disadvantage, especially with the significant down trading that took place and the surge in illicit trade that accompanied the tax increase.

Today, some 20% of cigarette consumption in Turkey is illicit trade.

We have tried to convince the government to restructure their taxes.

So far, there hasn't been much progress on that front, but we continue to be cautiously optimistic that over time they will realize that it's in their interest.

We repositioned L&M in the fourth quarter, and in fact, our share grew in the fourth quarter in Turkey.

That's why I mentioned we anticipate a recovery in Turkey.

In Greece, the tax structure has improved significantly with the tax reform.

As you know, Greece has been a drag on the whole European Union volume and income.

It remained at 3% drag for the year in terms of the EU's growth.

I think there's just been, with the tax restructuring, a price increase across the board and we are confident that Greece will no longer be a drag and that we can continue to gain share.

Ukraine, essentially what you've seen, is that over the last couple of years have been huge, successive excise tax increases such that in a two year period the low price segment has tripled in retail prices and the premium segment has doubled.

So, today at the low end, brands such as Bond Street, their retail price is equivalent to what the price of Parliament was two years ago.

And what has happened is that the market has compressed into the premium segment and the low price segment, and the mid price segment is under huge pressure.

In fact, we're doing very well in the premium segment, and we've lost in the mid segment and the low price segment and we have plans in place to address that.

Does that cover your question, David?

Very much so.

Thank you, Louis.

Thank you.

Christine Farkas, Bank of America Merrill Lynch.

Thank you very much.

A couple of questions, Louis, if I could.

Your comments about pricing in 2011 being stronger or anticipated to be stronger than in 2010, is that comment meant to exclude the Japanese revaluation of inventory, so maybe 6 points or 7 points of variance?

No, that obviously includes it, because our price variance in 2010 was approaching $1.7 billion, and in my remarks I said, that our pricing in this year would exceed that $1.7 billion.

Okay.

So that's all in.

A question on Turkey, if I could.

Given we are now cycling, I believe, the sharp tax increases from a year ago here in the first quarter, are you seeing a return to more normal demand patterns at all?

We are definitely seeing an improvement in trends.

The watch out, Christine is what I mentioned earlier, which is the surge in illicit trade.

And I think the government's very focused on that, but it is a concern.

Okay, great.

Finally, with respect to the EU, can you just comment broadly, and I suppose ignoring some of those countries with specific factors, but can you talk about the pace of trade up or trade down, and how you're seeing that progress, perhaps in light of a Marlboro and L&M across your major EU markets?

It sort of varies by market.

It's difficult to generalize for the whole European Union, Christine.

I think I could safely say that we have seen a slight improvement in the trends, certainly in the fourth quarter versus the nine months.

We have various actions in place.

I mean, Marlboro grew share in Spain in the fourth quarter, which was pretty significant.

Marlboro continues to do well in Italy.

It's been somewhat soft in France, but that's been offset by Philip Morris, which is also a premium brand.

Germany, I think I described in considerable detail.

We've done well in Netherlands, particularly, and in the Benelux, but Netherlands in particular.

There's just been a price tax increase and I would say that we're witnessing in a number of places a few pricing skirmishes, nothing all too dramatic, but things are heating up on the pricing front with certain companies repositioning their brands.

As I say, I don't think it's too alarming, but there have been a number of price skirmishes, particularly in the European Union and Central Europe areas.

Okay, great.

Thank you very much.

Thank you, Christine.

Chris Growe, Stifel Nicolaus.

Hello, good afternoon.

Hello, Chris.

Just a follow up on that -- the price skirmishes, particularly in the EU, with the tax structure changing there, I guess what I'm asking, is it related to the removal of the minimum excise tax, or is it something beyond that?

It's more just price related and share related?

No, because as I said, I think the taxes are moving all in the right direction.

As a result of the EU Tax Directive, I think it's just competitive moves, Chris, of certain companies repositioning brands in the lower price segments because of the economic weakness at the moment and the high unemployment levels.

Sure.

But it's not something that is too dramatic.

It just affects the competitive profiles out there.

Sure, okay.

And then, I wanted to ask just one more follow-up on Japan, and just understand, like your inventory levels in that market, is there any sort of rebuilding that needs to occur?

Are you, or maybe, can you give a little better feel of how much inventory levels have come down in general, in that market?

Well, we've obviously reduced our inventories at year end to align them with what we believe to be the running rate going forward.

Now, as I said, the indication since October, although they are very difficult to read, given both the trade, loading, and -- as well as consumer loading, but nevertheless, the indications are that volume is holding better than we had originally anticipated.

So, clearly there could be benefit there in terms of volumes, and if we have a run rate and volume that's better than we had anticipated, that may entail an adjustment in our inventories.

But, they are all sort of positives as opposed to negatives.

Sure, and then just one final question for you, just wanted to put in context the $250 million of cost savings, and just understand, would that fully offset what you see as some of your packaging and general cost inflation in '11, or would it fall short of that?

No, wouldn't fully offset it.

We will still be hit this year with the leaf price increases that took place in 2008, because of the length of our leaf inventory durations, they hit the P&L later.

So, this year our leaf price, or leaf cost, I should say relative to 2010 is about the same increment as we saw in 2010.

That should get better in 2012 going forward, because as we've said before, the supply/demand balance in terms of leaf tobacco has improved and we would anticipate that leaf tobacco prices will essentially be in line with inflation going forward.

That's very helpful.

Thank you.

You're welcome.

John Leinster, UBS.

Good afternoon, gentlemen.

Yes, a couple of things.

First of all, in regards to the new Marlboro architecture, has that now been fully rolled out to your satisfaction, or is there still -- are we actually seeing the annualization of some of the results in many of these markets now?

I mean, it clearly has been deployed in numerous markets.

But we're still not there.

There's still a lot to be done.

And there's still quite some exciting innovations to come.

I think as I mentioned in my remarks, you have to look at the consumer research we do in the demographic profile of the brand, and it has improved significantly.

I mean, we can see the trends, and for example, we have seen significant turnarounds in the demographic profile of the brands in places as varied as Italy, Japan, France, Spain, Switzerland, Netherlands, and the list goes on.

So, we are seeing an improvement in the brand's equity and demographics, and we still have quite a lot to do with the brand.

Alright.

And just slight different track for me, clearly how can -- Turkey will settle down now that you've annualized the big tax increase from generally last year.

Would you expect similar things to occur in UK and Romania and some of the other markets that were hit, or are those markets being -- going to suffer some consistent increases in use of trade, and then is it driven by different dynamics?

I think you're right in terms of annualization.

Things should get better.

The watch out is the illicit trade, which is affecting all three countries that you mentioned, and the problem is when illicit trade takes off, it's very hard to curtail.

Canada has been an example, where they have started attacking the smuggled product with some success.

Legitimate consumption or shipments were up close to 10% in Canada last year, solely due primarily to Ontario taking severe measures against illicit product, but Quebec is still relatively weak.

So, we hope that that will continue.

We should see improvements, Jonathan, but my concern is the illicit trade.

Right.

And lastly, just in Indonesia, which is obviously, we get limited information on, it still seems to be quite price sensitive, is that something you hope will trade up in the following year?

It seems quite surprising, given the economics of the country, that it hasn't improved a bit quicker.

Well, I would say that it's been pretty solid.

Consumption's up about 4%, despite pricing that has been ahead of inflation across the board.

What you see is that when you pass certain threshold stick prices, in particular, and pack prices, there's a temporary slowdown in a brand's performance.

There has been a new excise tax in Korea that came out, which clearly is manageable, excise tax increases are essentially in line with inflation.

The disappointment was, that we had hoped that there would be a compression in the various tiers.

That hasn't quite happened as much as we had hoped, but that hopefully will happen going forward.

But importantly, I think the government is more and more focused on the various loopholes that certain manufacturers are using to get excise tax benefits.

So, to the extent that those loopholes are closed, then I think you'll see a more pronounced shift in what you're discussing in terms of the up-trading.

And you would expect some progress on that during 2011?

Hopefully over the 2011-2012 period, probably more 2012.

Okay, great.

Thank you very much.

Thank you.

Adam Spielman, Citigroup.

Good afternoon.

If I could follow up on Christine's question very quickly, you said the pricing variance would be higher in 2011 than 2010.

But if you -- can you just, in your underlying assumptions for the earnings guidance, if you strip out Japan, how does the pricing variance look in 2011 -- ?

It would still be higher.

And are you able to say geographically--

-- Does that address your question?

I'm not sure I understand your question.

Well, would -- well let's say you've clearly -- the pricing variance in Japan is very positive, or will be very positive in 2011, and I suppose what I'm trying to do is get a feeling for the rest of the world?

Well, the rest of the world will still be above 2010, so the increment in pricing in 2011 versus 2010 is not solely due to Japan.

Is that clear?

Yes, yes, absolutely it's clear.

I guess the question is, is the increment in -- excluding Japan, is the increment in 2011 versus 2010 more or less than it will be in 2010 versus 2009?

And is that true sort of in each of your four regions?

I would say that, yes, pretty well, yes.

I mean, I'm not going to go region by region, because it is a subject that's rather delicate.

But the global pricing ex-Japan would still be higher in 2011, versus 2010, as it was in 2010 versus 2009.

Thank you very much.

That answers my question.Thank you.

Erik Bloomquist, Berenberg Bank.

Good afternoon.

Erik, good afternoon.

Thank you.

I was hoping you could update us on the outlook for Russia.

We talked about markets where there's been weakness, but it appears that the Russian market is improving.

And I was wondering if you could comment both on volumes, but also then on the outlook for pricing and up-trading?

Well, obviously the Russian economy is doing a lot better, driven by the oil price.

We have significantly revamped and strengthened our organization there.

We're gaining share.

There has been quite a significant price increase, as you have -- I believe you're aware.

There's been the usual skirmish of people delaying pricing and repositioning certain brands, but I think we're quite confident that we'll have a good year in Russia in 2011.

As it was in 2010, where income was up double digits.

Okay, super.

And then with respect to Japan, not to belabor the point, is it fair to think about the incremental pricing benefit around $500 million in 2011?

No, that's pushing the envelope.

Okay.

I think that's more like the full annualization of the pricing.

You've got to -- I think your number includes the pricing in the fourth quarter.

Okay.

And then lastly, could you update us on the status of plain packaging in Australia, and then, also your view on the plain packaging discussions under way in the UK and the European Union?

Yes.

It appears that the Australian government remains intent on pursuing legislation calling for plain packaging.

We'll see what happens.

My guess is we'll know a lot more by this summer, but there certainly seems to be a strong intent to pursue it.

It sort of defies logic because I don't think that it will affect consumption levels in any way.

And furthermore, the big concern is illicit trade, which, since the tax increase last summer, illicit trade has increased by 25% in Australia.

So, I'm hopeful that the government is looking at that very closely.

Because plain packaging will certainly not address that issue and does not -- will not address smoking incidence or smoking prevalence.

The UK has said that they would study it, but that they would have to have clear, unequivocal evidence that it would in fact address smoking prevalence or incidence.

And that they would have to look at very carefully the legal ramifications of such a measure with regard to constitutional issues, as well as IP issues, also related to trade issues and the trade agreements, and the intellectual property protection that comes with those trade agreements.

So the UK is looking at it very sensibly.

In the EU, the DG SANCO, the health commission, as it were, has started a revision of the Tobacco Product Directive and is looking at a whole slew of measures.

That's probably a three to five year process.

But as I say, I think plain packaging doesn't make any sense and we will fight plain packaging in every way possible.

Okay, thank you.

Does that address your question?

Yes, that's extraordinarily helpful.

Sorry, one last one on the Swedish Match joint venture, has that joint venture launched in another region aside from Asia and Taiwan at this point?

No, we've launched in Taiwan and we have the intention of launching in at least two other markets this year.

Great.

Thank you.

You're welcome.

David Hayes, Nomura

Good evening, gentlemen, hello.

Okay, just on the cost stage, which you're obviously giving on a one year forward basis, should we be thinking about ongoing $250 million on a medium term basis?

I'm just trying to get a feel for whether this is an ongoing medium term plan, or whether it's very one year specific and then kind of stops?

Second, just in terms of the strength of the volumes in the fourth quarter, just want to make sure my math is right.

So, of the 5% volume decline organic, about 3 percentage points of that is Japan I'm guessing, just want to check if that's right.

And then just in Mexico, loading into the channels, wondering what sort of impact that would have, or whether that was fairly negligible?

Finally, just in terms of regulation, plain packaging kind of follow-on.

In Uruguay, I just wonder whether if you can update us on where we are with that legal action in terms of potentially, or more specifically on the timing of an outcome of that, and what was the precedent that might set elsewhere?Thanks very much.

On your $250 million productivity target, we've decided that we would do an annual target rather than the three or five year target, because we wanted to be a bit more specific than just to give a general target.

I can't tell you what the cost saving will be in 2012, but clearly, we are very committed to remain best in class, in terms of cost efficiency.

And we're very focused on that, as you saw in our investor day, so I'm hopeful that, the $250 million this year will find more in the years to come, but the $250 million is specifically related to 2011.

Uruguay, I don't have much news to offer you, other than the litigation is most likely will continue.

We believe that we have the stronger of the case, and we'll see where that leads to.

And your third question, I'm sorry, David--

-- It's okay.

It's just on the strength of the volumes in the fourth quarter, so I'm just working out, I just want to make sure my Japan number's about right, it's about 3 percentage points of the 5% organic decline is due to Japan?

And then, I just wondered whether Mexico was a benefit, and whether that's quantifiable?

Yes, Mexico was certainly a benefit.

It was marginal.

If I recall, it was like 0.3%, 0.35%, something like that.

And, yes, I would say that if I took Japan and Ukraine, in particular, they were the lion's share of the decline.

Some 70%, if I recall.

Thanks.

Thank you.

You're welcome.

Rogerio Fujimori, Credit Suisse.

My question has been answered.

Thank you.

Thank you.

Ann Gurkin, Davenport.

Good afternoon.

Hello, Ann.

Louis, I just wanted to ask, what is your volume performance expectation for the overall EU market in 2011?

I'm not sure we're going to disclose that number, Ann.

I'm hopeful that it clearly will be better than it was in 2010.

Beyond that, I'm not going to give a specific number.

Okay.And then my second question.

Have you finalized all decisions and contracts related to RIP needs for the EU for 2011?

Yes, we have.

Great.

That's all I have.

Thanks.

At this time, there are no further questions.

I'll now turn it back to Mr.

Rolli for closing remarks.

Well, thank you for joining us.

That concludes our call today.

If you do have any follow-up questions, please contact the Investor Relations team here in New York this week.

We'll also be here next week.

We will be making a webcast presentation at the CAGNY Conference, the Consumer Analyst Group of New York Conference in Boca Raton, Florida on Wednesday, February 23, and look forward to seeing many of you there as well.

Thank you again, and have a great day.

Thank you for participating in today's conference.

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