菲利普莫里斯國際 (PM) 2012 Q1 法說會逐字稿

Good day, and welcome to the Philip Morris International first quarter 2012 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International's management and the question-and-answer session. (Operator Instructions). Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2012 first 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 first quarter 2012 and comparing them with the same period in 2011 unless otherwise stated. References to volumes are to 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. Net revenues exclude excise taxes. Operating company's income, or OCI, is defined as operating income before general corporate expenses and the amortization of intangibles. You'll find data tables showing adjustments to net revenues in 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. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. It is now my pleasure to introduce Hermann Waldemer, our Chief Financial Officer. Hermann?

Thank you, Nick, and good afternoon, ladies and gentlemen. We once again achieved excellent results in the first quarter of this year. Our organic cigarette volume increased by 5.3%, net revenues excluding currency and acquisitions were up by 10.9%, adjusted OCI also excluding currency and acquisition increased by 14.2%, and our adjusted diluted EPS excluding currency rose by 19.8%. Our strong business momentum continues, and this should enable us to perform well during the remainder of 2012, notwithstanding the previously disclosed difficult comparisons versus 2011 that we will face in the second quarter relating to the exceptional circumstances in the Japanese market during the post-tsunami crisis.

Consequently, we remain very confident in our ability to achieve the business results that we predicted when we issued our reported 2012 EPS guidance last February. However, since that time, the US dollar has strengthened against a number of currencies. As a result, we are facing a slightly stronger currency headwind and are now forecasting an impact of $0.15 in unfavorable currency this year, based on prevailing exchange rates, compared to the $0.10 previously disclosed in February. As a result, for exchange rate reasons only, we are revising our reported diluted EPS guidance for 2012 by $0.05 to a range of $5.20 to $5.30. It should be stressed that compared to our 2011 adjusted diluted EPS of $4.88, we are maintaining our forecast growth in the reported diluted EPS for 2012 of approximately 10% to 12% on a currency-neutral basis. Our forecast growth is fully in line with our long-term growth target for adjusted diluted EPS excluding currency.

One of the key elements favorably impacting our business is the reasonable excise tax environment. While there have been increases, most recently in Spain, we have not seen any disruptively large changes in any key markets this year. On the structural side, we continue to witness further improvements by a gradual increase in the specific proportion of excise taxes. Many governments now recognize that higher specific elements reinforce the predictability of governments to back our excise tax revenues.

Pricing continues to be the most important single driver of our profitability. The pricing variance was $369 million in the quarter. We increased prices notably in Argentina, Germany, Indonesia, Italy, Korea, Mexico, the Philippines, and Russia, and continue to benefit from the annualization of higher prices from last year. We also generated a positive volume mix variance of $224 million at the OCI level, as we grew volume and benefited from consumer uptrading in a wide range of non-OECD markets. The 5.3% quarterly organic cigarette volume growth is our best performance since the March 2008 spin. While boosted by the leap year and an undemanding comparison to the prior year, the improvement was notable for its wide geographic spread.

The Asia region led the way with a 12.4% increase. The growth in the EMEA and Latin America and Canada regions was around 3%, and the moderate decline in the EU region of 1.5% was the best performance in many years. In fact, volume increased in the first quarter in 13 of our top 15 largest markets by volume. This performance reflects the breadth of our superior brand portfolio. In the first quarter, every one of our top 10 brands by volume grew, with Marlboro notably adding 3.6 billion units compared to the first quarter of 2011. We were thus able to continue our strong market share growth momentum. Our market share in our top 30 OCI markets was estimated at 37.3% in the first quarter of 2012, compared to 36.6% for the full year 2011 and 35.5% in 2010.

Asia is our principal growth engine. The region as a whole is benefiting from a solid economic environment, a growing adult population in many markets, and increasing consumer purchasing power. Our organic cigarette volume grew by 12.4%, led by Indonesia, excluding currency and acquisitions, net revenues, and adjusted OCI, increased by 16.3% and 23.7%, respectively. Total industry volume in Indonesia grew at a double-digit pace in the first quarter. On a full year basis, we forecast an increase in the range of 6% to 8%. Meanwhile, our shipment volume grew by 24.9% in the quarter, making Indonesia the single largest market for PMI by shipment size.

Our market share was 3.5% higher at 33.4%. This tremendous result was achieved through the excellent momentum behind our leading machine-made premium lower-tar and nicotine brand, Sampoerna A, and the strength of our overall portfolio, which also includes premium Marlboro, mid-priced [mild], and low-priced brands. Our premium portfolio added over three billion units and accounted for over 60% of our market share gain in the quarter.

The underlying trend in Japanese industry volume has continued to improve. We are forecasting a moderate underlying market decline of approximately 2% in 2012, as smoking incidence has remained stable since the middle of last year. Our first quarter market share was 28%, well above the previous year's 25.6% and just slightly below the fourth quarter 2011 level. Our share was impacted by trade purchases of new JT products in March, when it dropped to 27.3%. So far, we have had just one new launch this year, Lark (inaudible) 100 millimeter, which achieved a satisfactory 0.4% market share in March. Both Marlboro and Lark remain strong, and we have a full pipeline of new consumer-relevant innovative variants that we plan to launch in the coming months.

In Korea, we implemented in mid-February a price increase of 200 Won (Sic-see presentation slides) per pack to 2,700 Won on Marlboro, Parliament, and Lark, which accounted for over 80% of our volume in 2011, while making some necessary tactical price adjustments to Virginia Slims. The preliminary indications are that, as expected, we have given back a large part of the share gains from the previous temporary price advantage in return for a significant margin improvement. Our endeavors to secure a reasonable long-term reform of excise taxation has been delayed by the parliamentary elections that took place earlier this month, but we will renew our efforts now that they are over.

Our results in the EMEA region were very strong in the quarter. Organic cigarette volume grew by 3.4%, driven in particular by Algeria, Saudi Arabia, and Turkey, and only partly offset by a reduction in sales in Egypt due to a surge in illicit trade. Our mix was favorable as adult smokers traded up to premium and mid-priced brands. We increased prices in the quarter, most notably in Russia, and pricing was also a key driver of our higher profitability. Excluding currency and acquisitions, net revenues and adjusted OCI were 12.6% and 18% higher, respectively, while we continued to increase our investments behind Marlboro and other key brands.

The strength of the economy has enabled the Turkish market to rapidly absorb the impact of the tax-driven price increases that occurred in the fourth quarter of last year. Our volume increased by nearly 10% in the first quarter of this year as our portfolio continued to perform strongly, and our year-to-date February Nielsen share grew by 0.7 points to 44.6%. Our mix has also improved behind premium Parliament and mid-priced Muratti. In Russia, recent price increases have not dented adult smokers' appetite for uptrading. Our above premium brand, Parliament, continues to perform very strongly and gained a further 0.3 points to reach a record 3.2% Nielsen share year-to-date February. Along with the strong performance of low-priced Bond Street and Next Slims, this has enabled us to grow our overall Nielsen share through the end of February from 25.5% last year to 26.2%. We remain optimistic that we can further strengthen our position in Russia, as the preliminary results of our new marketing programs and additional investments behind Marlboro and other key brands are showing early signs of promise.

In the EU region, total industry volume was down a modest 1.3%, despite weak economy conditions, notably in Greece and Spain. Both L&M and Chesterfield continued to gain share in the region. Their market shares were up 0.3 and 0.4 points, respectively, to a combined 9.8%. L&M is growing in particular in Germany, Poland, and Slovakia, while Chesterfield is performing particularly well in Austria, Portugal, and Spain. Marlboro's performance remains resilient, although its market share was down in the region as a whole by 0.3 points to 17.5%. Marlboro gained share notably in Belgium, the Czech Republic, Greece, Hungary, and Portugal, while its share loss in Germany was attributable to a temporary price disadvantage. Higher prices, notably in France, Germany, Italy, Poland, Spain, and the UK, enabled us to return to solid profit growth in the region. Net revenues and adjusted OCI were 5.3% and 3.7% higher, respectively, excluding currency. During the quarter, we continued to invest behind the new Marlboro campaign and consumer element innovative line extensions such as Marlboro [beyond].

Unemployment continues to increase in Spain, with no short-term expectation for any improvement. This is putting further pressure on the total market volume for cigarettes. During the first quarter, PMI's market share declined slightly to 30.2%, despite an improved performance for Chesterfield. As part of their measures to reduce the budget deficit, the Spanish government recently increased excise taxes on cigarettes, along with a restructuring that increased the relative importance of the specific element. In response, we raised our prices by EUR0.25 per pack across our portfolio, despite the government's failure to increase the minimum excise tax.

In Italy, cigarette industry volume declined by 6.1% in the first quarter, partly offset by strong growth in the fine-cut market, which remains relatively small at around 6% of total tobacco consumption. The key drivers of this decline are higher prices that have boosted industry margins and government revenues in more difficult economic conditions. While unemployment still remains below 10% in Italy, consumer purchasing power is under pressure. There has therefore been some consumer downtrading from premium and mid-priced cigarettes to low-priced international cigarette brands and fine-cut. This led to an erosion of 0.9 points in our cigarette market share to 52.6% in the first quarter. To address these trends, we launched Chesterfield fine-cut in the second quarter of 2011. This move has reinforced the brand as it has steadily increased its share of the total tobacco market and enabled us to achieve market leadership in fine-cut in the first quarter of this year with a 28.3% share. Our latest initiative was to launch during the first quarter of this year our Philip Morris Selection in the growing international low-price cigarette category, where we are underrepresented. Along with the higher prices, these strategies should enable us to maintain our profitability in this important market going forward.

The economies in the northern part of Europe show more favorable trends, as illustrated by Germany. Cigarette industry volume was up 3.1% in the first quarter, as the economy remained robust and contraband was reduced. The German authority recently closed down two important smuggling rings whose annual supply was estimated at some 400 million cigarettes. Marlboro was the first key brand to be sold in Germany at higher prices following the January tax increase and thus suffered a market share decline in the first quarter of 0.8 points to 20.4%. Nearly all competitive brands are now selling at new prices, so we expect an improved Marlboro performance going forward.

Our optimism is backed by the promising results from the initial phases of the new Marlboro Don't Be a Maybe campaign. Marlboro share amongst young adult smokers, minimum 18 to 24 years old, increased by five points in the first quarter to become the leading brand in this adult age group, along with L&M, with a 20% smoker's share for each of the two brands. PMI achieved an overall increase of 0.2 points in its cigarette market share in the first quarter at 35.9%. This was driven by the continued strong performance of L&M. The brand grew a further 1.2 share points in the quarter to 11.2%. As this remains well below its young adult smokers share, we expect to be able to continue to expand L&M's share in the German market going forward.

We also successfully increased our quarterly share in the fine-cut market with a gain of 0.9 points to 15.8%. This was driven by our two key cigarette brands, Marlboro and L&M. The Latin America and Canada region was a solid contributor again in the quarter. Organic cigarette volume grew by 2.9%, thanks to share and market growth in Argentina and favorable timing and trade inventory movements in Mexico. We increased our share in Columbia and Mexico, where Marlboro continued to perform well, with gains of 1.5 and 4 points, respectively. Excluding currency, adjusted OCI increased by 4%.

On a global basis, the illicit trade in cigarettes is estimated at some 600 billion units. While at times a risk, it also offers PMI a very significant volume and profitability opportunity. The potential benefits of corporation underpin our joint efforts with many authorities across the world. Canada, Germany, and Romania are recent examples of successful reductions in contraband. In this context, we welcome measures being proposed by the provincial government in Ontario to reinforce its laws against illicit trade. Based on similar measures, the Quebec government has stated that it increased its provincial tobacco tax revenues by more than [CAD]200 million over the last two years.

Free cash flow was $1.7 billion in the first quarter, a decline of 23% excluding currency. Net earnings increased by $245 million or 12.3%, confirming that the business fundamentals are in excellent shape. This was, however, more than offset by $742 million increase in our working capital and other requirements, due mainly to the timing of receivables in the quarter and industry forestalling in the EU region, a phenomenon that should be fully reversed as the year unfolds. Let me remind you that forestalling occurs when manufacturers build up inventory in excess of normal supply chain requirements ahead when excise tax increase. This competitive phenomenon becomes an issue whenever the payment of the excise taxes occurs prior to the depletion of the finished goods inventory. We are, therefore, working with governments to introduce and when necessary, reinforce anti-forestalling measures. This would reduce our working capital requirements and provide governments with higher tax revenues without undue delay.

In addition, capital expenditures are higher this year. We are investing in productivity-enhancing factory modernization, equipment for innovative new products, the consolidation of our operations in the Philippines, the expansion of our capacity in Indonesia, and other projects. At the same time, we are on track to deliver on our $300 million pre-tax productivity target in 2012. During the first quarter, we spent $1.5 billion to repurchase 18.1 million shares at an average price of $83.07. Our target remains to spend $6 billion on share repurchases this year. Since the spin through the end of March this year, we purchased a total of 432.1 million shares at average price of $52.88. Our annualized dividend of $3.08 per share generated an attractive yield of 3.5% at the market close last Friday. Since 2008, we have increased our dividend rate by 67.4% under our policy that targets a 65% dividend payout ratio. We continue to generate superior shareholder returns compared to our tobacco peers, our wider consumer product peers group, and the broader markets.

In conclusion, the first quarter of 2012 has been another excellent one for PMI. Organic volume was very strong, and we benefited from consumer uptrading in non-OECD markets. All our key brands are performing well, led by Marlboro and Parliament. We are fully on track to deliver again in 2012 against our currency-neutral long-term target of 10% to 12% adjusted diluted EPS growth. In the first quarter, we once more outperformed our tobacco and broader consumer product peers in terms of shareholder returns. We remain very confident about our outlook for the remainder of the year and beyond, notwithstanding the difficult comparison we will face in the second quarter due to Japan. Thank you for your continued interest in our Company and its excellent growth prospects. I'm now happy to answer your questions.

Thank you. We will now conduct the question-and-answer portion of the conference. (Operator Instructions). Our first question comes from Judy Hong of Goldman Sachs.

Thanks. Hi, Hermann.

Hi, Judy. Good morning.

Just in terms of your guidance for the full year, notwithstanding the currency guidance change but just underlying ex-currency guidance, just because you had a pretty strong first quarter, it kind of implies that the rest of the year would show some slowdown in terms of the year-over-year. So other than the comparison issue, how are you thinking about the balance of the year? Are there anything just at the margin, whether at the macro level or competitive level, that's giving you some caution here? Or is it just really too early in the year and you want to see how the year unfolds?

I think the most important point is really your last point. We are early in the year. Yes, we are facing a difficult comp in Q2. But the underlying business, as I said also in the prepared remarks, is in very good shape. We're very happy. There is really no change in the business prospects that we had expected when we gave our initial guidance on the business side in February. It's just early in the year. There's always upside in life. There is also risks in business. That's why our guidance also is a guidance that spends $0.10.

Okay. And then, secondly, in Japan, so it sounds like in March the shipment share ticked down a little bit. Do you have the off -- the consumer off-tick share for March? I'm just trying to understand how effective some of these competitive activities and the load in is translating at the consumer level.

Yes, I think if you look at the shipment shares, and generally it is 28.3 February, 28.5, and then March, 27.3. It is pretty obviously that this is influenced by competitive trade load. The fact simply is that the year only has had, so far, one launch this year, the Lark Hybrid 100s. In the same period, JT had three launches. Our pipeline is also there. This is going to come in the next month.

So I think we are in a very good position. The market dynamics are back to normal again. The novelty impact is always there. In Japan, you were asking for off-take shares. They are very, very slightly below 30%, so that's a very, very small decline to what we had seen the two months before. Also, that's when I would say is driven by the novelty and the trial of new products that have come to the market.

Okay. And then finally, in Europe, you called out the volume performance, obviously down 1.5%. You had somewhat of an easy comp, but just in terms of the decline being more modest in that market. If you can just maybe more recently some of the increase -- again, renewed concerns about the macros and the consumer sentiment there. How do you think about your ability to continue to see improvement in Western Europe?

Well, I think there are -- Europe is, of course, a mixed picture, as we all know. And if you just take the two extremes, if you like, on the good and the more difficult side, the German cigarette market has been growing 3.1% in the first quarter versus previous year. There is in Spain, while there was some growth, but there is really just due to very, very undemanding comps in the first quarter of last year, where really the retailers had brought down their inventories quite a bit. The Spanish economy continues to be very difficult. Unemployment continues to increase. So I again would expect the Spanish market for the full year still to be down at least 10% again, so let's not be misled by the first quarter.

So that is quite a mixed picture. But if we really kind of step back for a moment and look at really what has happened more on a macro basis in terms of volume trends, then I would say, yet, the so-called more mature markets, the decline rates have really moderated if you compare that to, say, three years ago. At the same time in a number of emerging markets, the growth rates actually have accelerated compared to three years ago, and there, of course, taken together combined with our great portfolio and our momentum all at the same time market share provides us with potential opportunities for further volume growth and for good performance. That's more from a macro picture.

Okay. Great. Thank you.

Thank you, Judy.

Your next question comes from David Adelman of Morgan Stanley. Please go ahead.

Good afternoon, Hermann.

Good afternoon, David.

I know you normally don't talk about specifics about discrete quarters, Hermann, but given the unusual dynamics you face in Q2 with both Japan and currency, is it realistic to expect EPS to be down in the second quarter? That is certainly my forecast at this point.

Well, David, we have never really made or given quarterly guidance. I won't do it now, as well, either. I mean, the two points you need to keep in mind here are that the hurdle due to Japan is about $0.10, EPS cents. So the calculation there really is the market in Q2 in Japan was about 45 billion cigarettes. Our market share was 42. Our retention share is about 28. That makes a difference of 14. Market price on the market size is a volume hurdle of about 6.3.

You take the margin, you take the cost, you deduct the tax, you divide by the number of shares, and that brings it to about the $0.10, so that I can confirm or reconfirm. We have said that before. And other than that, I would really refer you back to the full-year guidance, because that is what really counts, and our continued conviction that business from the menthols are doing well. We are doing extremely well. Things are good. Things are in order, and they keep on going as we had expected from the very beginning of this year.

Okay. And then two other things, Hermann. I think in your prepared remarks you indicated an expectation for Japanese cigarette consumption to be down about 2%. Did I hear that correctly, for the year?

That is correct, yes.

Why do you think it is getting better? Because even prior to the excise tax increase, that market's rate of decline was substantially higher and arguably getting worse, going from 3%, 4%, 5%, to 6%?

That is correct. And as I said it in the question before, also, I mean, it is not only Japan. The trend of moderating decline rates in the so-called mature markets is a Japanese phenomenon. It is also a European phenomenon. Extremely hard to pinpoint that down to what it is. The fact really is in Japan now, completely back to Japan, that actually the smoking rates have been stable, smoking incidence has been stable, since at least middle of last year.

Okay. And then lastly, Hermann, with this continued growth in volumes in Indonesia, are there any issues on your capacity or the availability of cloves?

We are increasing capacity. That is part of the reason why CapEx is going up. Of course, we are adjusting our capacity to the needs there. On cloves, that's a cyclical harvest, actually. Typically, you have a strong harvest in one year. You have a weaker harvest in the other year. 2011 was a weak year in terms of overall clove harvest. The indications for this year are good. It should be a strong harvest, and of course, that would lead to replenishment of the clove stocks that will then, of course, perform.

Okay. Thank you very much.

You're welcome.

Your next question comes from Bonnie Herzog of Wells Fargo Securities.

Hi, Hermann.

Hi, Bonnie.

I just wanted to start with a question on pricing. You mentioned you are clearly benefiting from price realization. So how realistic is it for this to continue at these levels? And do you attribute this to your innovation efforts and price management or more due to the health of the consumer? And then, I would like to understand how aggressive you've been with your -- managing your gaps.

I would say managing price gaps has a lot to do with managing price structures. And price -- tax structures, not price structures, tax structures. And we have seen improvement in tax structures in many, many places. I give you a couple of recent examples. France increased the specific component at the end of last year. Spain just right now, the excise tax increased there and at the same time rebalancing from (inaudible) and specific tax. We missed out on the minimum tax in Spain, and let us hope that it is going to be corrected going forward. Only at the beginning of this week, actually, in a press conference of the Deputy Prime Minister in Turkey and the Finance Minister in Turkey, they also announced that they will look at the structure of excise tax there without increasing overall tax burden and that they will implement a specific element into the overall structure. Details, timing, all that remains to be seen, but that is, again, an important step forward. Again, also this week, a public announcement of President Putin in Russia, that, yes, there will be regular excise tax increases in Russia but that there shouldn't be any excessive excise tax increases there, either.

So, a lot of improvement. Brazil earlier, where they began to do away with the -- those many tax tiers that clearly were at a disadvantage for Marlboro. So there is improvement in a lot of places, and that helps. And then as well helps you and as a consequence helps us to put in the correct and the right price gaps.

Okay. Thanks. And then, Hermann, on volume. Your volume growth was strong and then balanced across your regions. And then drilling down into Asia. It sounds like a lot of the robust industry volume growths. I'd like to understand what's driving this growth, other than is it the growing population, GDP growth? Is it the consumer behavior, increased smoking incidence? Just kind of want to hear a little bit from you, more color on this and then understanding the underlying dynamics and how sustainable this industry volume growth in Asia will be over the next five years.

Yes, the origin is, of course, what you said. It is the overall economies. And many of those economies, and I take Indonesia as an example, have really excellent macroeconomic indicators. So Indonesia GDP growth is forecast at 6.5%, consumer confidence is really high, inflation expectations are 5%, i.e., there are real wage increases there, so improved affordability. A growing adult population is, of course, another factor that plays in there. And then it all comes together and you have the right brains to compete in such a market. This is how you generate your volume growth, your market share growth, overall.

I mean, Indonesia, to stay with that example, has been growing a bit more than 12% in the first quarter. I don't expect that to happen for the full year, but I still expect a strong growth of about 6% to 8%. That factors in, that in that market eventually the existing subsidies for fuel prices will be reduced. That's going to take out a little bit of the purchasing power. That is the reason why I would expect the 6% to 8%, but a 6% to 8% is, of course, again, very strong growth in the Indonesia market. Just to compare, it will now be well above 300 billion, i.e., at the size of the US market or even slightly bigger.

Okay. And then just a final question on your forecast for volume for the year, given this strength. I think you had talked about flattish growth for 2012 in terms of volume. Is it realistic to assume that you're going to see faster maybe low single-digit volume growth this year?

I would say including the Japanese hurdle, I would continue to expect stable volumes, eventually slight growth. If you would exclude the Japan hurdle, the 6.3 billion that I was quoting earlier, then we definitely expect strong organic growth. It wouldn't be that far away, actually, from the 1% target.

Okay. Thanks, Hermann.

You're welcome.

Your next question comes from Chris Growe of Stifel Nicolaus.

Hi. Good morning, Hermann.

Good morning, Chris.

Good afternoon. Thank you. Just a question for you. If I could follow up on Bonnie's question right there about volume, I wonder -- again, given the strength that you are seeing in your business but broadly across the world, improving economies and whatnot in Asia, how do you see the overall tobacco market, from a volume standpoint, growing this year? Is it also down a little bit still this year, or are you seeing better performance there overall?

The global number is hard to predict, but I would say there are really many places in the world where, relatively speaking, if you take the last three years horizon, that the situation is actually improving. So what I mentioned earlier really on more moderate decline in the mature markets and stronger growth in the emerging markets, there I can see at the same time, there are a number of markets there, the potential or the actual uptrading has come back. That would be Russia. Russia is not going to be a growing market. I would expect, again, say, a 2% decline this year, just like the two years before. But here you have the uptrading phenomenon there. So the combination of all those factors provides the basis for a continued growing and successful business for us.

Okay. All right. I want to ask you about two markets, the first one being Japan. Just a quick question there. Do you expect that -- I think this comment was made on the last quarter's call, that your constant currency profit would grow in Japan this year. Would that be a reasonable assumption?

Well, we were just as certainly what we are targeting, and we should be about in that range, yes.

Thank you. I just wanted to confirm that. The second question as it relates to Russia. You obviously had a good performance in Parliament, a little softer market share performance for Marlboro. And a lot of your growth came in the lower end with Bond Street and Next. Is that -- are you seeing a trade down effect? Obviously, you had one premium brand doing well and one -- and some lower-end brands doing well. But I just want a better sense of that market and how the consumers are faring there. And the trade-down factor in Russia is what I'm getting at there.

The really declining segment is the low-price filter and non-filter segment. So there is uptrading in the market overall. And then don't forget that there was another price increase in the market. So if you like, people had to uptrade in any case because prices were going up. Then if you look through the portfolio, actually Parliament, our above premium brand is growing tremendously, a record market share of 3.2%. That's really excellent.

Yes, Marlboro in the quarter is still down 0.2% to a 2% share. Marlboro is on a low basis in Russia, as we all know. Well, that you also have to see in the context that we actually increased the price for Marlboro by RUB5 to RUB60, a price positioning measure we took there, which is just part of our overall efforts in that market. Marketing sales, price positioning, product, everything goes together how we want to bring back Marlboro in the growth track in that market. So don't pay too much importance to the 0.2 in the month. We are working on the equity of Marlboro, and that obviously doesn't show from one quarter to the next. That is a longer-term investment, which we are willing to go.

Thanks for your time.

You're welcome.

Your next question comes from Rogerio Fujimori of Credit Suisse.

Hello, Hermann.

Hi.

I just want a quick question about trading inventory movements. So you refer to a few movements in -- unfavorable in Russia, favorable in the Ukraine. So I was just wondering if there is anything else we should bear in mind when we think about Q2. Thank you.

In terms of trade inventory movements or in, if you like, what I called undemanding comparisons in the first quarter, that would, of course, be Japan, that would be Mexico at the other end of the world. But otherwise, nothing in that sense unusual. There will always be trade inventory movements from one quarter to the next. That's pretty obvious. But nothing spectacular that I could see there.

Thank you.

You're welcome.

Your next question comes from Jon Leinster of UBS.

Good afternoon, Hermann.

Hello.

Couple of questions. First of all, I think on the EU side, you mentioned quite rapid declines in Portugal and Greece in volume terms. Is that something you can quantify? Are those seriously declining markets or not that important?

Well, for the individual market Greece is, of course, their declines and the deterioration we have seen in that market, it is important. If you apply general PMI scale in terms of comparisons, then of course quarter-on-quarter there last year to this year, Greece is not important. Simply the situation in Greece or in Spain in our market reflects the very serious underlying problems of those two economies.

So, I mean, in rough terms, in terms of Portugal and Greece, what are they knocked off in terms of volumes?

The total market size is in Greece in the first quarter. Now you test my memory. Not too much. So Greece, about 1.2 billion. It's in the range of 20% to 25% down in Greece.

Right.

And it really reflects what you see in the economy, which is why I cautioned earlier on Spain. If you just look at the market this quarter, that will be misleading. It's just comparing to a first quarter of 2011, where retail -- where the tobacconists have really brought down their inventories dramatically and where you had the first quarter, where the full-fledged public smoking ban also came into effect. So Q1 Spain this year compares to a very weak Q1 Spain last year, which is why I said I expect another at least 10% decline in Spain for the full year. And the 10% decline expectation is probably realistic for Portugal as well.

Secondly, clearly, the volume growth in Indonesia is -- well, almost [depressed]. But is there no comeback from government in terms of rapid tax increase? Is there are no sort of health sort of debate in Indonesia as to whether or not tax issues rise significant to offset the volumes?

Well, excise taxes have gone up also in Indonesia in the range of 7% to 8%, which compares to an inflation expectation of 5%. It's not that there are no excise increases in this part of the world, there are. It is just the overall economy, the environment, is simply a growth environment, a strong growth environment. And it is kind of at the other extreme of the scale when you -- we were just talking Spain, well, when you talk Indonesia, we talk about everything on the other side.

Lastly, in Korea, obviously, you put the prices up in February and the impact seems to have been a 5% drop in market shares. Are you surprised by the speed of reaction of the consumer in Korea and the loss of the market share quite so quickly? And do you know if that has gone to other premium brands, or has that caused the market to trade down? Have they switched to cheaper brands?

No, essentially the beneficiary in terms of shares was, of course, the company that has not raised the price. It's the only company that has not raised prices, KT&G, that was combined by a fairly bizarre consumer campaign on their side highlighting the difference between the foreigners and the Koreans. And that was the impact, but that stuff at the end of the day is an impact at the moment. We are back now to a more normal situation going forward, and the underlying trend that the Korean consumer, because international products or the Korean products, that has not changed because of those events.

Right. So the market is basically traded down on the back of that, is really what you're saying.

Yes.

Okay. Thanks very much. Cheers.

You're welcome.

Your next question comes from Jon Fell of Deutsche Bank.

Hello there. Couple of things. First of all, in Latin America, slightly subdued underlying unit growth of 4%, considering the revenues are up 5%. Just wondering if you could you talk us through that a bit. I think the statement referred to organization, or reorganization in Venezuela and Colombia. Is that a short-term thing, or is that going to have an impact later in the year? And then secondly, could you just update us on where we are with the various challenges to plain packaging in Australia. In particular, I'm wondering when we might get a result from the hearing that has just closed. Thank you.

So, Latin America first. Well, yes, we have -- we are in the process of closing the [cost leaf] plant that we have in Venezuela. That is correct. And then some organizational adjustments and stuff that we also had in Colombia, but salary impacts there. And we are in the process of discussing our plans in Mexico with the employees' representatives. So that is really what is going on there on the cost side. This is ongoing management of our business. This is nothing -- an underlying cost increase that will be there now forever.

Moving over to the plain packaging situation, yes, the hearings in Australia in front of the High Court have been finalized today. The court has reserved demand for judgment, so I would expect a decision from the High Court in Australia in the third quarter. But as you rightly say, this is not the only legal avenue. There are three legal avenues and three proceedings out there, the second one being the claim that Philip Morris has under the bilateral investment treaty between Hong Kong and Australia. There the situation is that the first two judges on that panel have been selected, the judge that we select and the one that the government selects. Now, those two judges are in the process to select the third arbitrator and judge for the panel. We expect that to happen sometime now in April or in May. So I would expect the first procedural hearings in that case in June.

But as we always said, don't expect a rapid judgment. This is a process that is going to take from there at least another two years. The third avenue is legal proceeding between governments, i.e., the proceedings under WTO. So the first two countries that have started proceedings under those rules are Honduras and the Ukraine. I would -- we would expect actually more countries later in the process to join that effort. Again, however, a process that is not going to last just a couple of months. These are longer processes but promising legal avenues.

Thank you very much.

You're welcome.

Your next question comes from Chris Ferrara of Bank of America.

Thank you. Hermann, it looks like in this quarter, the mix impact to revenue was negative, not to margin but to revenue was negative for the first time in a little while. You are talking a lot about trade-up. Can you talk about what would have driven that mix impact to the top line so I can understand it more clearly, and I guess the difference between the top line impact versus the margin impact? Because, obviously, one is a profitability thing, and one is a price per pack thing. Can you talk about the interplay between those two?

Well, there must be a misunderstanding, quite frankly, because in the quarter, our pricing variance is $369 million and the volume mix impact is a positive $224 million, actually adding up to $593 million, almost $600 million, i.e., an increase of more than $300 million versus first quarter of 2011.

Right. And I guess that's the volume mix? I'm just talking about the overall, the mix impact, the revenue mix impact. You know, I guess I'll take that one off-line. That might be my misunderstanding.

Okay.

I guess another one on the rate of profitability increase in Asia. The margins, they jumped pretty nicely in a quarter where average pricing has been going up in that market. This quarter wasn't a particularly large increase in pricing in Asia, relative to others. Could you just give a little more clarity on why the margins jumped so nicely in Asia this quarter?

This is, of course -- this is a number of markets. This is many markets. This is Indonesia, we talked about before. This is Korea. These are price changes in many markets. It is just on a quarter to quarter, sometimes there can be just timing, which quarter comes first. But there is nothing really unusual. We don't -- we take the pricing as we deem appropriate, but there's no specific trend out there that I could see.

Okay. Thank you.

You're welcome.

Your next question comes from Erik Bloomquist of Berenberg Bank.

Hello, Hermann.

Hi, Erik.

Just one question on Turkey. It looked like the markets were reported quite robust, in the overall market up 3%. I am wondering if we can expect those to continue to recover, and particularly given what you're suggesting with tax structure reform, does that bode well not only for the market, but then I would think particularly for Philip Morris?

I would say it bodes well also for the Turkish government. Such change is clearly in the interest of the government. Overall, I mean, Turkey as a country, has a good economic outlook. Turkey has shown us often in the past that, yes, it's volatile, it's often steeper on the way down, but it is also definitely steeper on the way up. I think that is what we see again. We see a situation where over GDP growth expectation of 4%, so things are going pretty well.

And then it comes to us. While we have a superb portfolio, this Parliament, this is Marlboro, this is Muratti, this is Lark, this is L&M, this is Bond Street. We cover the entire range, and that's really, I would say, the secret behind our success in that market, that we welcome a change in the excise structure, of course we do. And as you know, we have been working with the government on that. Now, as I said earlier, so the government has declared their intention to provide changes. As to the nature and extent of the change, the timing of the changes, is still open. Taken all together, certainly positive dynamics for the Turkish markets.

Okay. Thank you.

You're welcome.

Your next question comes from Ann Gurkin of Davenport.

Hi, Hermann.

Hi, Ann.

I want to return to the discussion about pricing and the pricing you realized in the first quarter and what we know about potential excise taxes in different markets. Is there any change to expected contribution from pricing for the year in your numbers?

No. I mean, our plans for the year have remained the same. Obviously, I will not divulge what our plans are going forward. But look back to the last three years, four years, and you can see that pricing has been a constant factor and has been an important factor in our growth over those years and continues to be and honestly always will continue to be.

Okay. And then if I could also ask you about the UK's review of standardized packaging. Any comments you can make on that?

Yes. Well, the UK has actually announced at the beginning of this week that they start a consultation period lasting 12 weeks. As you know, they have done the very same thing 2.5 years ago. The government has clearly stated that they want to listen to the public views, that they want to consider the legal implications, that they want to consider potential costs to retailer, and the impact on demand for smuggled and counterfeit cigarettes. We will participate, of course, in that consultation. We will show that there is no credible evidence that plain packaging will reduce smoking rates and that, on the contrary, the plain packaging has serious adverse consequences, including an increase in black market for counterfeited, smuggled cigarettes. And those markets are armed by criminals. So on the basis of the same facts than 2.5, 3 years ago, I would hope and expect that the government comes to the same conclusion.

Right. Thank you so much.

Thank you, Ann.

Your next question comes from Michael Lavery of CLSA.

I was wondering if you could talk a little bit about the Marlboro brand and specifically how you think about it globally versus in any one given country. It's certainly got some struggles in Russia. How critical is it to turn it around there? And if your portfolio is growing in total, does Marlboro need to be a bigger piece of that for you to consider that a successful market for you?

Well, Marlboro is tremendously successful in many, many places around the world, and it has been growing also in this quarter, its volume quite a bit. That being said, well, the world is never really perfect, and we are always open as well about disclosing where we are not happy with the situation of Marlboro. Russia would be the one place. We are just too competitive and ambitious people to accept that Marlboro will stay on a 2% share in the big Russian markets. Marlboro can do more, and this is why we put the resources behind, the creativity behind. This is about marketing, this is about sales, this is about retail, this is about products, also and product innovation for the Russian markets. So we are investing, because we want to improve the situation.

And other markets where the situation on Marlboro has been difficult over the years is the German market, where Marlboro essentially today is the only premium brand left, because everybody else has repositioned to the low end of the market. However, that being said, low in Germany means $0.50, $0.60 below the premium pricing. This is therefore not a price problem, it is an equity problem. And here again in Marlboro, for Marlboro in Germany, we have therefore worked on the campaign, the new Be Mobile, Don't Be a Maybe campaign, which is showing strong signs of really -- of success there and is improving quite a bit the smokers share amongst the 18- to 24-year-old innovation that we have brought to the brand has helped enormously. They actually stand in Q1 for 10% of the total volume of Marlboro.

So you see, we are tackling it from all ends. But it is important to remember that while there are places here and there where our performance can be improved and we are working to improve it, if you put it on a global scale, then Marlboro is doing very, very well, and it is doing extremely well in the most important Asian markets.

That's helpful. And then just going back to one comment you made on Korea. Obviously, there is a consumer sort of transition period to get used to the new prices, but you had said something about how it seems like it is already back to normal. Have you already seen some share come back, or do you just mean that the competitive dynamics is sort of reset where that can continue from here?

No, I think the share losses have occurred, come back not yet. Just saying at the end of the day, the competition in Korea will be amongst brands, and we certainly have the stronger brands in this market compared to our local competitor there.

Okay. And then lastly, just on tax, it looked like the rate was a little higher this quarter than it has been running. Is that something that will wiggle back down a little bit, or do you think this year's rate may just be higher in general? What kind of outlook should we expect there?

The quarterly rate is our projection for the full year.

Okay. Thank you very much.

Okay.

Your next question comes from Thilo Wrede of Jefferies.

Good morning, Hermann. I only have one quick question for you. I notice that in your -- in the press release in the country by country discussion, you started breaking out the Philip Morris brand in many more countries. Is that a brand that is getting more attention from you? What is behind that?

No, I mean, the Philip Morris as a brand has always been one of our core international brands. It is just, if you like, the brand that we have selected to address the -- our underrepresentation in the low-price international segment in Italy. So it has always been a very strong brand, for example, in Argentina. It has always been a strong and growing brand over the last 10 years, I would already say, in France. No, it's just one of our top brands, but there is nothing -- there is no underlying change in the way we look at it.

All right. That's all I have. Thank you.

You're welcome.

Your next question comes from Thomas Russo of Gardner Russo & Gardner.

Good morning, Hermann.

Good morning, Tom.

You mentioned that -- I have two quick questions. You mentioned that Egypt stumbled based on an increase in illicit trade. I'm curious about the magnitude of that and where it is coming from. You've done such a good job stamping it out in other parts of the world. Where is it coming into in Egypt? Secondly, can you update us on your sense of your capacity to reinvest? You mentioned that you're directing more money towards Indonesia and the Philippines. I was wondering about other markets and also the new product work that you're doing. What does the uptick in prospects for regions and new products suggest that you'll be able to deploy in capital going forward versus what you once thought?

Okay. Egypt is just really a recent surge in illicit trade. There wasn't too much in the market before. The estimate -- but that's a pure estimate now, is that it probably has already reached about 20% of (inaudible) in Egypt growing. It is actually eating primarily into the international brands, not really in Cleopatra, which is the low-price Egyptian brand. Quite frankly, that's a question of enforcement and capability to enforce. This is a difficult situation these days in Egypt.

Yes.

Then in terms of capacity to invest, is there your question rather really on the CapEx side?

Absolutely. Yes.

On the CapEx side. Okay.

Putting out long term capital behind the rising prospects of geographies for you and also the possible prospects for new product launches and acceptance thereof.

Yes, in terms of -- really of CapEx, we have not changed really our multi-year average that CapEx should be in the one-to-one ratio in relation to depreciation and amortization. From one year to the next, it can be above and then a little bit below. The average will be there. In terms of big categories where we invest, that would be super high-speed machinery. There is machinery today that can produce 20,000 cigarettes a minute.

Then, of course, in the important Indonesia market, that would be the capacity increase that we have there. Then we are in the process of finalizing the Greenfield factory in Korea. We are investing in Korea. So the secondary is up and running. The primary will be running in July, August of this year. In the Philippines, we do the factory upgrades following the business combination there. So it's ongoing. In terms of other investment for innovative products, as you know very well, the margin dynamics of this industry, if you really have a seller, the investment on CapEx is amortized pretty quickly.

Yes, last thing. Hermann, can you share with us, in this low-rate environment what have been your best terms? There was a comment about an extraordinary low rate paid for some meaningful amount of borrowings. What is the high-water mark at your issuance at the moment?

Yes, you are right. In March, we actually issued $1.25 billion of bonds, $550 million with a five-year, 10-year at 1.625%. And we actually issued those 30-year bonds for $700 million at 4.5%. So as you can see, again, we think also long-term and not just short-term benefit, i.e., we have increased the time to duration of our outstanding debt. In terms of total cost of debt, the year-to-date number would be 4.2%. It has been 5% in the year 2010. It has been 4.4% in the year 2011, i.e., it keeps on coming down.

Thank you.

You're welcome.

Your final question comes from the line Priya Ohri-Gupta of Barclays.

Hi, good morning. I have a very quick question around your short-term borrowings balance. It looks like it spiked up pretty significantly in the quarter, despite some of the longer-term issuance that you did. Could you just speak to what sort of what the moving pieces were there? Thank you.

Well, essentially as you said, this is short-term. We are able to borrow at extremely favorable rates on the commercial paper market. That was actually a $3.7 billion at 20 basis points average, by the way, 20 basis points, average at month's end. This fluctuates, so the year-to-date average would be already -- $1 billion less would be $2.7 billion. Last year's average was -- the full-year average was $1.9 billion. So you would always have fluctuations there. But in terms of overall financing, really, the basic principles and the cornerstones around it have not changed, the most important being that we want to be comfortably in the middle of a single A credit rating.

That is very helpful. Thank you.

You're welcome.

And that was our final question, sir. Do you have any closing remarks?

Okay. I just want to thank everyone for joining us today on the call. If you have any follow-up questions, you can contact the Investor Relations team. We're based here in Lausanne this quarter. So thank you all, and have a great day.

Thank you for joining the Philip Morris International first quarter 2012 earnings conference call. You may disconnect your lines at this time and have a wonderful day.