菲利普莫里斯國際 (PM) 2013 Q1 法說會逐字稿

Good day and welcome to the Philip Morris International first quarter 2013 earnings conference call.

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

(Operator Instructions)

Media representatives on the call will also be invited to ask questions at the conclusion of the questions from the investment community.

I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications.

Please go ahead, sir.

Welcome.

Thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2013 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 of 2013 and comparing them to the same period in 2012 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 companies income or OCI is defined as operating income before general corporate expenses and the amortization of intangibles.

You will find data tables showing adjustments to net revenues and 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 back of this presentation, which is also 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 or review of the various factors that could cause actual results to differ materially from projections or forward-looking statements.

Now it's my pleasure to introduce Jacek Olczak, our Chief Financial Officer.

Thank you, Nick, and welcome ladies and gentlemen.

We have had relatively sound start to the year when one considers the difficult comparison with a very strong first quarter last year.

Our business fundamentals continue to be solid, and we have a good momentum in key markets and segments.

In February, we provided a report of the diluted EPS guidance for 2013 of $5.68 to $5.78.

We see no reason to change our guidance today due to business factors.

However, we have witnessed increased currency volatility and in particular a weakening of the euro and the yen due to the economic crisis in Europe and changes in economic policy in Japan.

Accordingly, as prevailing exchange rates, we now forecast a full year unfavorable currency impact of approximately $0.19 per share rather than $0.06 included in our previous guidance.

Our revised report to diluted EPS guidance for 2013 is [data] for $5.55 to $5.65 compared to $5.17 in 2012.

This reflect the growth rate excluding currency of approximately 10% to 12% compared to our adjusted diluted EPS of $5.22 in 2012.

This is matching the growth rate that we announced in February.

This is fully in line with our mid to long term currency-neutral annual growth target, highlighting the continued strength of our underlying business model and the robustness of our growth algorithm.

Let me now take you through our first quarter results and provide you with our outlook for some of our key markets.

Organic volume in the first quarter was down by 2.1% excluding the Philippines.

This reflects three main factors.

First, we had a difficult comparison over very strong first quarter last year when organic volume grew by 5.3% year on year.

This was helped by the leap year.

Second, there was a reversal of trade inventory build ups that took place in several markets during the fourth market of 2012, ahead of expected tax and price increases.

It notably impacted Turkey.

And third, cigarette markets in the EU region continue to be influenced by the economic crisis and high unemployment levels.

I would nevertheless like to highlight the fact that excluding the Philippines, we achieved organic volume growth this quarter in the Asia and EEMA regions and continued to expect organic volume growth on a global basis for the full year of 2013.

The decline in our volume and overall difficult comparisons over the prior year impacted our financial results in the first quarter of this year.

Net revenues and adjusted OCI were up by 3.2% and 2.9%, respectively, excluding currency and acquisitions.

Despite this, our adjusted diluted EPS performance excluding currency was solid with growth of 8.8%.

Prices, pricing continues to be the key driver of our income performance.

Our pricing variance in the first quarter reached $531 million, significantly higher than that achieved during the same quarter last year.

Since October, we have notably increased prices in Argentina, Australia, Brazil, France, Mexico, the Netherlands, the Philippines, Poland, Russia, Saudi Arabia, Serbia, Spain, Turkey, Ukraine and the UK.

In addition, last week we announced new prices in Germany.

The favorable pricing environment is backed by the strength of our brand portfolio and supported by an excise tax environment which, with the exception of the Philippines has been rational and characterized by structural improvements.

Our market share growth momentum continued in the first quarter with gains in three of our four regions and the Asia region essentially stable excluding the Philippines.

Marlboro volume excluding the Philippines was down by 2.2% in the first quarter driven by cigarette industry volume declines in the EU.

Nevertheless, Marlboro market share increased or was essentially stable in all four regions excluding the Philippines.

Marlboro achieved notable share gains of 0.7 and 0.8 points, respectively, in the EU and the Latin America and Canada regions during the quarter.

However, premium Parliament continued to show great momentum with a volume increase in the quarter of 5.4% despite the trade inventory reversal in Turkey.

Parliament continued to gain share in its key market of Kazakhstan, Russia, Turkey and Ukraine while making furthering inroads in the Middle East.

L&M volume increased by 4.3% in the first quarter of this year, driven by its positive momentum in the EEMA region and the resilient share performance in the EU region.

Free market [thinned out], namely Egypt, Russia and Saudi Arabia and we also are pleased by L&M's renewed growth in Russia.

Let me now review what is happening in key geographies.

I start with the EU.

The situation in the EU has attracted considerable attention given the region's high level of profitability and the depth and duration of the economic crisis.

Consumer product companies have been suffering as average unemployment levels reach double digits and continue to grow.

The key driver of our 10.1% decline in cigarette volume in the EU region during the first quarter was the decrease in industry volume of 10.5% over notably steep decline in southern European markets.

The decline was exacerbated by unfavorable trade inventory movement and fewer selling days.

We also remind you that the first quarter was the strongest for cigarette industry volume in the region last year.

While overall tobacco consumption levels remain fairly stable, there continues to be down trading for cheaper fine cut proposition and to illicit trade.

Fine cut industry volume increased by 2.1% in the first quarter and the latest EU study indicate that the level of illicit trade has climbed to 11.1% from 10.4% a year earlier.

Taking the distortions of the first quarter into consideration and based on our analysis of current expectations for the remaining three quarters, we continue to forecast the cigarette industry volume for the full year 2013 in the EU region should decline broadly in line with that of last year.

We are encouraged by our market share gains in the EU region.

Our share was up by 0.7 points to 38.1%, though I should mention this was partially flattered by the impact of competitive trade inventory movement.

We gained share in our five most important EU cigarette markets, namely Italy, Poland, France, Germany and Spain.

We also gained share in some of the smaller markets such as Finland, the Netherlands and Hungary while the market share declined notably in Greece, the Baltics, Denmark and Portugal.

Our four key brands continue to perform well, highlighting our strong business fundamentals.

However, our volume was hampered by the prevailing very weak economic conditions.

Marlboro's regional share increased in the first quarter by 0.7 points to 18.7% as the brand performed well in its five largest markets.

L&M share was stable at 6.6%.

Chesterfield share was up by 0.2 points to 3.7%, driven by markets such as Austria, Portugal and Spain, as well as geographic expansion.

Finally, the Philip Morris brand gained 0.3 points to reach 1.9% thanks to its continued growth momentum in France and the success of the Philip Morris Selection in Italy.

While the overall growth over the fine cut categories slowed down in the first quarter, we again outperformed the competition with an end-market sales volume increase of 7.6%.

We are continuing to successfully roll out fine cut volumes of our leading cigarette brands, Marlboro, L&M and Chesterfield into new markets.

As a result, we increased our category share by 0.7 points to 14.1% and captured 48% of additional industry volume.

Let's now focus on the two of the most important markets in the EU region, namely Italy and Germany.

The economic downturn in Italy has been severe, with a decrease in real GDP of 2% last year and an increase in unemployment from 10.1% in February 2012 to 11.6% a year later.

This has resulted in a decline in consumer purchasing power which we believe was the main driver of the 9.5% decrease in cigarette industry volume in the first quarter of this year.

The second important factor has been an increase in illicit trade, the incidence of which doubled year on year.

The fine cut category, meanwhile, no longer will follow the reduction in the excise tax and price differential with cigarettes that took place in the middle of last year.

We believe that the rate of decline of cigarette industry volume in Italy should moderate during the remainder of the year.

However, this is contingent on the elimination of the previously planned July [VAT] increase.

The underlying fundamentals of our business in Italy remain strong.

Our cigarette markets share grew by 0.6 points in the quarter to 53.2% as the continued momentum of Marlboro and the success of Philip Morris Selection in the international low price segment more than offset the decline of Merit and Diana.

We are also continuing to gain share in the fine cut category with an increase of 3.3 points in the first quarter to 30.5%, thanks notably through the successful recent launch of Marlboro fine cut.

German market was distorted in the first quarter by the leap year effect, trade inventory movement and an increase in [Marlboro] sales.

While the cigarette industry volume was 6.6% lower in the quarter, we estimate that the underlying decline was a more moderate 2.8%.

During this period, fine cut industry volume increased by 1.2%.

The German economy continues to be resilient with low unemployment, and this has translated into more robust overall tobacco market trends including the recovery in the premium cigarette segment.

Our business is in good shape with our cigarette market share slightly higher at 36.1%.

Marlboro grew by 1.5 points in the quarter to 22.3% and achieved its highest cigarette share since the fourth quarter of 2009.

This confirms the positive response to our new Marlboro initiative.

While L&M cigarette share declined by 0.7 points to 10.5%, this reflects the timing as the brand share is sequentially stable.

Importantly, we have consolidated our leading position among young adult smokers with a 20% share for L&M and a 17% share from Marlboro.

Last week, we announced for the trade an increase in our cigarette retail prices of essentially EUR0.20 per 19 cigarettes across total portfolio.

This should come into effect at the retailer in May.

I will now turn to Asia, where we are continuing to strengthen our business, our organic volume grew by 2.8% excluding the Philippines during the first quarter.

Indonesia was a key contributor.

Our cigarette volume increased by 4.9% in Indonesia during the first quarter of 2013.

We again achieved a strong share performance with a gain of 1.4 points to 36.3%.

As anticipated, the rate of growth has moderated as certain brands are being impacted by the crossing of key price thresholds in line with our strategy of regular price increases.

Our share gains were driven by the continued strong performance of premium Sampoerna A which was up by 0.8 points and by mid-price U Mild, which was up by 1.2 points.

Marlboro, meanwhile, expanded its share of the [light] non-Kretek segment by 4 points to 75%.

Industry volume was up only slightly during the quarter after a 13.9% surge in the same period last year.

For the full year, we are forecasting a growth rate of around 5% to 6% in line with the current 12 month moving average.

The resilience of the Indonesian economy continued improvement in consumer purchasing power and the growth of the adult population and [their team] to continued industry volume expansion.

In Japan, cigarette industry volume decreased by 3.2% during the first quarter, and we forecast an underlying decline of around 2% for the full year, in line with recent trends in adult smoking incidence.

Our shipment volume increased by 6.9%, reflecting favorable distributor inventory movement.

Intense competitive product and marketing activities, notably around Japan Tobacco's morphing of Mild Seven into Mevius impacted the Lark and Philip Morris brand.

As a result, PMI reached a first quarter market share of 27.5%, 0.2 points below that of last quarter of 2012.

Marlboro, meanwhile, maintains its share.

We believe that the recent launch of Lark Ice Mint 5 milligram and 1 milligram and natural mint 100 millimeters product and the planned launch in May of Marlboro W-Burst 5, a double capsule menthol innovation, should enable us to resume a more positive share trend.

In the Philippines, a disproportionate tax increase that took place in January has as expected caused significant market disruption.

In January, we increased our recommended retail prices of key brands by 60% to 70%.

However, the price of individual cigarettes set by the trade which account for about 70% of total retail sales increased by a larger amount in numerous outlets.

In the first quarter, our volume declined by 42.5% by reflecting the consumer reaction to the higher prices, the prior year trade inventory build-up and then the impact of the new prices on the trade working capital requirement.

Cigarette industry shipments are estimated based on Bureau of Internal Revenue data to have been down by 39%.

However, [news in consumer uptake] and our market research data indicate that cigarette consumption was down significantly less.

The difference reflects the aforementioned trade inventory movement and in particular a surge in illicit trade.

In March, we saw sequential improvement in volume, and provided the government is successful in its efforts to improve excise tax administration, we still believe that the industry volume should decline by about 20% to 25% for the full year 2013.

We expect some share erosion due to aggressive competitive pricing at the bottom end of the market.

Let me now turn to the EEMA region, where we achieved a 1.4% volume growth in the first quarter of the year.

The strong result was driven by share gains in eastern Europe, the Middle East and north Africa and favorable distributor inventory movement in Russia, partly offset by the anticipated reversal of the December trade inventory build up in Turkey.

In Russia, cigarette industry volume declined by about 5.5%.

This was due to recent targeted price increases of RUB6 to RUB7 a pack which corresponded to between 9% for Parliament to 22% increase for Optima.

In line with previous years, we expect this decline to moderate while adult consumers adjust to the higher prices.

We estimate that the total market will be down by around 3% on a full year basis.

Our volume increase of 1.8% in the first quarter reflected the timing of shipments to our distributor.

Our market share during the first two months of the year was stable at 26.2% with gains from above premium Parliament, mid price L&M and low price Bond Street and Next, offset by declines from mid price Chesterfield and super low price Optima.

Turkey is an example of a market where a strong underlying performance was distorted by specific dynamics in the first quarter of this year.

There were significant increases in trade inventory levels in the fourth quarter of 2012 that were reversed following tax and price increases at the beginning of 2013.

As a result, consequently, while cigarette industry volume declined by 11.6% year on year, the underlying market showed a slightly positive trend thanks to lower levels of illicit trade.

On a full year basis, we forecast that underlying industry volume should be relatively stable.

Our volume was down by 17.4% in the quarter as were disproportionately impacted by the trade inventory movement.

Our market share in the first two months of the year was up slightly to 44.7%, Spring and Parliament and mid-priced Muratti continued to bate growth momentum, while Lark and L&M lost ground to competitive brands that were priced lower at the bottom end of the market.

In conclusion, we expect to deliver strong results again in a very challenging year.

We remain confident that despite another difficult year ahead in the EU region, we should be able to generate organic cigarette volume growth on a global basis excluding the Philippines.

We expect this year to again achieve the financial targets of our mid to long term currency neutral annual growth algorithm.

Our new reported diluted 2013 earnings per share guidance includes the latest currency rate and is $5.55 to $5.65.

This reflects the full year growth rate of approximately 10% to 12% excluding currency compared to our 2012 adjusted diluted EPS of $5.22.

I should point out that we foresee our growth will be skewed toward the second half of the year.

We anticipate strong free cash flow growth excluding currency in 2013.

We will remain committed to rewarding our shareholders through attractive dividends and substantial share repurchase programs.

We will continue to judiciously invest to [arrange for us] the long term prospects of our business.

In the first quarter, we spent another $1.5 billion in share repurchases.

Since March 2008, we have returned a total of over $50 billion to our share holders and repurchased 24% of the shares outstanding at the time of this [ping].

Thank you, and I will now be happy to answer your questions.

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

(Operator Instructions)

Chris Ferrara, Bank of America.

Thank you.

So it sounds like you are broadly re-iterating industry volume projections for the year in most places like the EU and like Indonesia despite what was a pretty poor volume quarter.

I guess the question is was Q1 volume worse than you had expected?

Or was it pretty much in line with what you thought it was going to be?

Well, taking into consideration -- you remember in February we said we had about a 75% of the pricing already implemented announced for the year, which was pretty high compared to other first quarters in the years before.

I think it was rather expected.

Usually after the price increases, there is this initial sort of dip in the market, and then the markets are coming for some sort of recovery.

This was not unexpected, and remember in the first quarter for both PMI in total but especially for the EU, first quarter of 2012 was pretty strong quarter.

We've been almost growing at the 6% PMI and the jumped decline of 1.5% in the first quarter of 2012.

No, I don't think we had any surprise in the performance in the first quarter.

Thank you.

I guess what I'm trying to get to is whether how you feel about the 10% to 12% on a constant currency and whether you just -- whether Q1 represents just a little bit more of an obstacle relative to getting to that number but you have the flexibility to get there.

Or whether there really is no change and you still feel you are in the same place within that guidance range of 10% to 12% than you were before.

We're very confident about the guidance.

You notice we are revising the guidance, the February guidance only for the currency.

I think the business fundamentals are very strong.

The brand portfolio performance essentially all through our main markets is pretty solid.

We had some distortions in the quarter which I was mentioning in my remarks.

The only thing which I would like to add is that we are clearly looking in the second half of the year to be somehow stronger than the first half of the year.

For a number of reasons, we have annualization of some increased spending behind the mainly marketing and sales from the last year which will have an impact on us especially in the first half of the year.

Still some inventory distortions which will continue for the second quarter of this year.

But all in all, we feel pretty confident about the guidance.

All the risks which we knew are there.

EU volumes, U pressure on the volumes and also the Philippines that the initial impact -- I included baked in our guidance, and as I said, we are pretty confident on a 10% to 12% growth for this year.

Great, thank you very much.

Vivien Azer, Citi.

I'm curious as we think about Italy, I recognize that your guidance reflects no VAT increase.

Can you speak to the probability of no VAT increase occurring and conversely if you do see an increase, how would that impact potentially your guidance for EU volumes?

Well, I maybe start with the second part of the question.

I think we still at this stage, despite the 10% decline of the reported volumes in the EU for the first quarter, we still think that broadly, the rate of decline for the full year will be in the range of debt which we had last year.

So 6.3% if I remember correctly.

Underlying volume decline in the EU region for the first quarter we estimate was somewhere in the range of 8% if I eliminate some distortions which were during the quarter.

Italy is essentially the only market of the main market which we have on the watch list in the EU.

As we still don't have a clear clarity what's going to happen with the announced VAT increase.

If you follow the politicians' announcement, no one, regardless of the party they belong to, would like to have the VAT increase.

However, in order to have a clear best wish to materialize, they have to follow the government and they have to change some legislation.

We will have to watch how this situation unfolds in Italy.

I think with the exception of the VAT increase in Italy, I think the EU still can be broadly with the rate of decline that's comparable to last year.

Fair enough.

As a follow-up to that, can you comment perhaps on your outlook for operating income growth in the EU?

I think you said in the past you could hold your EBIT flat.

Considering the significant trade down that you are seeing in the market, I wonder whether that needs to be adjusted downward or all.

It's very much dependent on the total volume but the lot in the EU.

If news from Italy are positive, I think we can maintain all the profitability.

If Italy talks will happen and depends on the pricing of actions, that might have some impact on the profitability in the EU.

Assuming my forecast estimates for the total EU volumes to be broadly lined of the rate of decline in the last year, I think we can maintain the profitability.

Understood.

Thank you very much.

David Adelman, Morgan Stanley.

On the EU, with weaker volumes, not just for you, but obviously for the competitors, are you seeing any change in or an increase in competitive intensity, companies going more for share than they might have a year ago?

Or is it fairly stable?

No, no whatsoever.

We had the pricing in quite the number of markets at the very beginning of January and over toward the end of last year.

On the pricing side, I would haven't observed anything.

No, I don't think there is a risk of that nature.

Okay.

And then in the Philippines, you mentioned to get to 20% to 25% declines in volume for the year, you need the government to crack down on the non duty paid dynamic.

But that's an historical factor in the market.

Is there any evidence that with prices up and the illicit volumes growing that the government is taking that any more seriously than it has in the past?

I think there was a problem historically, absolutely right.

Historically we had some problems with some non-duty paid domestic product.

However, that thing essentially exploded since new tax kick in and we will increase the prices.

As I said, if we look at the consumption trends, our estimate of the consumption trade if Philippines at the moment as we speak, so this is still relatively early after the new prices hit the market, I would argue that the consumption decline is in a lower range of 20% to 25% decline, which will follow the market for the full year.

Then smoking incidents stay relatively flat at 50%, flat at 50%.

And yet we do upsell some decline in the daily consumption, market is very much driven by the daily consumption and market is very much driven by stick purchases, about 70% of the volume goals on the stick purchase.

And we see the daily consumption dropped from a 13 to 12 sticks per day.

You add these numbers together, and you are actually in the longer range of a 20% to 25% decline.

We see our shipment volume and the industry volumes as estimated by the Bureau of Internal Revenues and we have a huge job to reconcile.

We see the volumes in the market so they are clearly coming from illicit sources.

Then lastly, Jacek, on cash flow, you re-iterated the objective of having a growth year on year currency neutral and free cash flow.

But it's down quite substantially in the first quarter, and I think that's the second consecutive first quarter with a substantial decline in cash flow.

Can you speak to what happened in the discreet first quarter cash flow?

Why is it down?

And what's going to be different in the remainder of the year?

Thanks.

I think there is an allotment on the finished goals and receivables and the tax payables, excise tax payables connected with the force-building volumes built up in ventures.

They actually improved.

We had the one item if you like which was the timing of the payment of the withholding tax on the profit which were up to the US which happened to take place in the first quarter of this year.

If I take that item out, actually my free cash flow would be up.

We still are confident that the free cash flow for the full year can grow actually at a higher rate.

That repayment cash outflow was later in the year last year and it was in the first quarter this year?

Happens to be to take place in the first quarter of this year.

Thank you.

Judy Hong, Goldman Sachs.

Couple of questions in Asia.

First, just in terms of your margin performance there, clearly you had the impact of the Philippines volume, there but you had pretty strong volume in Japan as a result of some inventory movement.

But the margins are still down.

Can you help us understand the margin performance in Asia in Q1?

I think it's mostly driven by Indonesia.

The cost pressure and the prices and which reels in very manufacturing significantly increased over the last period.

So we had the pressure of that.

And pricing in Indonesia has a tendency to be built over the year rather than just at the beginning of the year.

Usually you will have a slower start.

You will have a cost pressure coming from Indonesia.

And then at the beginning, we cannot offset it fully by the pricing.

And I think this should disappear during the year and actually Asia should be able to improve the margins for the full year.

And then in Japan, so I think you called out share was down a little bit and called out the increased promotional activities from your competitor.

Can you elaborate sort of the promotional -- the nature of those promotional activities, how much do you think that is in part driven by the currency movement that's given JT more of a cost advantage and that market, and do you think that will continue to put a little bit more competitive pressure in your business and how you are responding to that?

It is difficult for me to comment how JT is allocating their resources.

Clearly the marketing promotional spend both in terms of a new product introductions and the promotional support of existing products in the market from JT in the first quarter was massive.

To that extent, we lost some share on the Lark and Philip Morris.

However, on a positive note, I haven't seen the Marlboro losing adult in assure.

So finally speaking, I will read it as a positive on Marlboro that despite the very high spend from a JT, we maintain the market share of Marlboro while I have to admit that Lark and Philip Morris contributed to some erosion of overall share.

We have launched Muratti toward the end of the quarter, so we don't see any in the quarter to innovative cuts and product behind the Lark and we also announced launch of a new Marlboro highly innovative, the first two capsule product which will hit the market in May or June.

Our ambition is still to grow the share in Japan.

But as I said, we are confronted with the massive spend from JT.

Lastly in Australia, following the implementation of the plain packaging, with a kind of consumption performance or trends are you seeing and then what's happening in terms of your actual volumes?

In Australia, roughly four months since the introduction of the plain packaging.

At this early stage, the Australia market has not yet shown any significant changes in consumer purchasing behavior.

The volumes in the quarter were stable.

And if you compare that with the 4% decline which happened in the first quarter of last year, this was reflected stable volumes I believe reflect the impact of the disruptions in connections with the transition to the plain packaging last December and there was inventory depletions, et cetera, when manufacturers had to replace the old parts with the new parts.

And frankly speaking, based on the first quarter data, it would appear that consumer down trading might have accelerated slightly.

But this strength, however, has been a part of he Australian markets for several years.

Where a consumer is showing more sensitivity to the rate of tax and price increases, and if you remember in February of this year, there was a price increase I think of around 4% in the market.

If I take all of the things together in short, I think at this moment the impact of plain packaging could sell if it's not already evident in the market.

Thank you.

Bonnie Herzog, Wells Fargo.

I wanted to ask a little bit about price gaps and if you can give us more color on whether or not down trending pressures are increasing in some of your non-OACD markets, and I guess what's going on broadly with your price graps and outlook for this as the year progresses?

Frankly thinking I don't see that much of a pressure on the down trading.

And have to take the EU out of the equation.

Although as you have noticed, the Marlboro share continues quarter on quarter growth in the EU.

And even in Germany recently we see the[ res-actual] improvement segment slightly growing, a phenomenon we have not seen for a long time.

Outside the EU, it's a different form of trading.

I mean, you see the premium segment growing in a number of markets being Indonesia, being Turkey, being Vietnam and big or smaller market.

The Russia more trading is happening from the low price segment to the mid price segment, I think the premium segment in Russia is flat as we more or less seen it over the last during the last year.

So I don't think it's that much of the risk to us or any worries that would come from a down trade.

And as you've seen, Marlboro actually and Parliament I should mention, they are growing.

It grows all [juggle reference].

Okay, that's good.

Then in terms of Japan, can you touch on what you think the likelihood for the price increase ahead of the consumption tax increase in April of 2014 is and then what are the necessary steps and timing of getting this to happen in the country?

Well, Japan still is a market where there is a sort of a price control, if you like.

This was require the consent of ministry of finance.

And as you know, we are of the market leader in this market and not necessarily we are calling the shots.

So they also have to see the announcement of the tax and sales tax increases at the beginning of the next year will happen because we also hear the news that maybe government will change the policy.

Nothing concrete, but we will have to see how it unfolds.

And my final question on NGP and just maybe an update on the progress again you had with your clinical trials and then recently [VAQ] talked about their less harmful cigarettes and then their strategy to transfer their technology to their existing cigarettes.

And I guess not necessarily new lines.

I'd like it if you could talk about your approach with your NGP and how you plan on rolling that out and how you will address that either with your brand franchise or new lines and sort of the pros and cons of these strategies.

Well, our progress is per plan.

Above with the clinical and engagement and also being ready to finally start building our manufacturing capability.

As you remember, we have a free platform of NGP which we are working on potentially simultaneously.

I believe all of them all together should address all consumers' needs in the market.

Our, however, fundamental common denominator behind this free platform is we're not going for the selective reduction of a small constituent.

We just want to bring the high level, and therefore we focus on the reduction of the changing the process from the combustion to heating, et cetera.

That's our approach and we feel confident about it.

Thank you.

Jon Leinster, UBS.

Just quickly.

The Eastern Europe, Middle East, Africa and Latin America, Canada region both seems to have surprisingly strong price mix.

Particularly given the sort of geography where the volume growth has been in the Africa, eastern Europe.

Can you explain why that is?

It's essentially the foldout in north Africa.

It's other locations as well.

We're also benefiting from some disruptions which we had on the supply chain and especially the beginning of last year, and you remember there was some disturbances because of the connected with the [oddox springs] et cetera.

Once we broke the stability to our supply chain, our brand full distribution and clearly we are reaping the benefit of this, and I think in Latin America it's pricing which we take in Brazil.

There was a pricing in Mexico at the beginning of the year and pricing in Argentina I think in the first quarter.

So I think altogether, this contributes to the stronger pricing contribution coming from the territories and also the volumes.

As I mentioned in north Africa especially.

Just with regards if you ignore the Philippines for a time and look at various trade and venturing movements that appear to occurred in the first quarter because it was positives in Japan and Russia and negatives in Turkey and the Ukraine.

Excluding the Philippines, is that a net benefit to the sales line or net negative?

No.

I think you might think of positive from Japan and positive in Russia, and that's essentially two places where we had the positives.

I think the negatives will offset this one.

It's a drag on the quarter rather than a benefit than you like in the quarter.

Lastly, pricing in the quarters is very strong.

Presumably at that rate do you think you could exceed the $1.8 billion from last year?

For obvious reasons, I cannot comment about the future pricing.

Yes, I think the quarter indicates that pricing is strong.

As obviously supported also by the pretty pragmatic if I may say so regime again excluding the Philippines as we discussed.

And it's a good pricing environment and here we will have a stronger pricing volume.

Okay.

Thank you very much.

Chris Growe, Stifel.

I have a couple country-related questions for you.

The first one is in relation to the Philippines.

I just was curious about two factors there.

One is that you are seeing low price competition.

And I guess I'm curious is Fortune not going to basically lower prices or get more promotional and aggressive to meet that, and then related to that, Marlboro did relatively well.

I'm curious of the price gaps, and I know it's early.

If the price gaps are at all allowing for a better performance of premium brands.

As we said, unfortunate thing about the Philippines tax change is the magnitude of the change in a short period of time.

The markets increase.

However, immigration of the reduction of the tiers and fully specific system, they do support the price gaps matter.

Clearly Marlboro going forward should benefit from closure of the gaps in the relative terms.

When it comes to the low price competition, I think we have to remember about one thing.

Philippines is a free pricing market.

Retailers can set the prices on their own in the outlet.

There are about 1 million outlets, 1 million outlets in the Philippines out of which we cover about 25%, roughly about 25%.

What our sales force have to go and manage the right price per stick, which is important in that market and price per pack and bring that price down to the recommended level.

That's clearly something which we are doing in the first quarter, and I think it will continue heavily in the second quarter.

It obviously requires extra spending.

But I think once we bring the prices to the recommended level, we should be in a good situation.

I also should mention that the sequential evolution in the volumes in the Philippines when we started the year, I think the first weeks of the year, our shipments were down by 50%.

And very quickly we moved to the 40% and then the 30% decline, and actually if I look at the essentially last few days, we almost at the 20%-something decline.

We know that the market -- the farther the market goes in the right direction, we have to manage the price and address and help the government or hope that the government will improve the tax collection from more market participants.

That's helpful color.

Thank you.

The other question I had for you was in relation to Russia.

Marlboro had a softer performance.

I was curious if that was related to inventory movements a year ago.

I know inventory overall was a benefit to Russia, and just to understand, the investments you made in the market, I know Marlboro has been a key focus for you.

Any comment on that or any relation to the weaker performance this quarter?

Investment in Russia is behind Marlboro but also behind the Parliament, L&M and a number of our brands and in general building the stronger and robust industry infrastructure and sales market.

There is not just the Marlboro which we are investing and Marlboro is our focus as you know is the only brand for which internal we have a much higher expectation for the performance.

There is a significant price increase and I will have to wait a little bit and how the prices and the situation tabulate in the market.

I will argue that Marlboro essentially for the last few quarters in Russia is flat.

Obviously should get higher, and for the time being, it's flat.

Marlboro for the last few years took a RUB5 higher price increases than the rest of the market because in the meantime, we are trying to reposition Marlboro to the premium segment.

If I take over large price increases in Russia and Marlboro adding on top of this RUB5 and a brand stable for the last few quarters, I think is actually good thing about the brand.

However, we still have to wait until the Marlboro markets is going to go.

Thank you very much.

Michael Lavery, CLSA.

I want to ask a question on Indonesia first to understand how you think about the competitive threat if any from the [genkom] mild that just launched a couple of weeks ago.

It's just new in the market.

They are doing TV commercials, they've got a little bit of a price discount to A-mild.

Is that something you might spin to defend against or do you see that mild has been where the share gains have come?

How do you think about that as an addition to the competitive equation?

Well as you remember, last year, we grew the share by almost 3 points.

We did this quarter reopen with almost 1.5 point share advancement.

So our share continues to grow.

I have to admit that the last year our share growth was somehow supported by the more attractive price points for a number of our key brand.

Some of these as we continuously the pricing in increasing the prices in Indonesia, and some of the attractive price points we will lose.

But we still are looking into the share growth in Indonesia.

And we launch the products and extending our products as well.

I don't think it's any sort of a threat which I will see at this stage coming from the front picking up a competitor in particular.

Okay.

That's helpful.

I know you touched on this a little bit, but can you give us more color on the pacing that you said the second half will be stronger.

But 2Q and 3Q are your easiest comparisons, so can you highlight some more of the reasons that 2Q wouldn't also be as strong or what will help 4Q that the second half would be stronger or just what some of the drivers are that shape how the year plays out?

I think the reasons why I said that we expect second half of this year to be stronger than the first half -- are a few reasons.

One we will have a new organization.

We have a new organization of increased spending.

We started already in the first half in 2012.

This was mainly Russia but also some Asian markets.

It's also in the timing of our launches which we had the first half of last year versus the first half of this year.

Second, I mentioned we have to increase our spending in the Philippines toward the end of the first quarter, and I think it will continue for the second quarter to address the situation which we will have with the compliance with the recommended prices at the retail level and also there is competitive pressures there.

Also as you remember, we said already in February that the three-quarters of the 75% of our pricing was already in pretty early in the year.

And yes, that way some of this volumes will have to recover and that recovery in some places may continue for the Q2.

Then obviously also the shipment patterns which are having in the market with some distortions will continue actually for the Q2.

As I said, we expect the second half to be much stronger, to be stronger than the first half of this year.

That's helpful.

And then just my last question, you talked before about the opportunity and it could be to regain even sort of your fair share of illicit trade or just to stem that growth even.

It seems to be more of a threat than an opportunity.

What can make that tide turn?

I know you put money into Poland and things.

Is that -- how far off is that from having an impact?

When can we see that actually start to become something that is heading the other way instead of gaining share?

This is a process.

It's going to take time.

I mentioned in my remarks is one of the market where despite the price increases, and tax increase and price increases.

The government a lot of right things on illicit trade and we see the volume coming to the industry.

Despite the price increasing, we still think the volumes for the full year have by recovered the illicit trade is going to be flat.

So we consider.

I think also that recently I think this week really started in EU will start to be another serious wake up call for the number of the states in EU.

Letting the contraband growing from 10% plus last year to 11% plus this year in the middle of the crisis, it doesn't necessarily tell us a good thing about number of the law enforcement authorities in the EU countries.

It's going to take time.

I admit.

We are working and working on tightening the supply chain.

There is a cooperation among the industry members.

The alleged industry members, and more have to be done.

Okay.

That's helpful.

Thank you.

Thilo Wrede, Jeffries.

Good morning.

I will -- I think you alluded to it already, but in markets like Italy you have a down trading market and the premium brands you have there are getting market share.

Can you give us a little more background to how the dynamics there work?

I think first of all, there is a number of the brand support activities which we are deploying behind Marlboro.

The whole commercial organization, commercial approach which we already announce at the time when we have the investors day last year here and start the yielding results.

Second in most of the countries, the tax regimes more and more supporting -- not allowing too much of the down trading.

Price gaps despite the fact that they are price increases tends to narrow.

You have the medium taxes, very high minimum taxes and also specific structures.

I think it's all together has clearly brand like Marlboro, and I think Marlboro quarter after quarter in terms of the check with you, et cetera, it's getting into better and better shape.

Okay.

And then in Japan for the last three quarters, the market share has been drifting down again after the post tsunami gains.

What's your outlook at what point you can actually maintain your market shares in Japan?

Well, I still think that we can make a solid advancement in Japan.

The quarterly 27.5%.

I mean that's not what we would expect.

I think we still have three quarters to go.

We have a pipeline of our products and the programs in place.

As I said earlier, the previous questions.

There is a massive support from JT behind the modules in terms of the product promotion is already pretty active with launching the product.

It's a competitive environment.

I look at this also positively that this pie, this massive spending and activity coming from competition or competitor, Marlboro actually is extremely resilient.

That's the very important for us.

We will have to address this situation with a large city going forward.

Great.

Thank you.

Erik Bloomquist, Berenberg Bank.

Just a brief question on the United Kingdom and the outlook for plain packaging there.

I thought the comments in Australia were helpful, but what do you see in terms of the risk of the UK government moving forward on plain packaging and how do you see such a movement if it does occur affecting the approaches of other governments within the EU that have expressed interest such as the Irish most recently?

Thanks.

Well, not much from the UK actually because the government still has not revealed what is the conclusion of the public consultation and impact assessment, et cetera.

We are waiting for the decision of the government which directions they will want to go.

At the same time, there is still a type of product directive which is in the making, I mean still pretty important steps to go with the product directive and will have a much better visibility really how many markets are key if you like and the plain packaging because how many markets would it?

You know the plain packaging in the European Union and the members has the number of political challenges for the implementation, so we'll have to see.

As I said, so far it's early, but so far especially on the smoking on a consumption of the cigarette in Australia, you don't really see as expected frankly speaking any impact coming from the plain packaging despite what was promised in the beginning.

As evidenced, I've got feeling it's not being built in Australia.

Still no evidence.

Thank you.

Rogerio Fujimori, Credit Suisse.

Hi.

Could you talk a bit about your other two big markets in the EU, France and Spain.

Particularly France, you reported market volumes down 8.6%, but in the last call, your decline 3.4% in January.

It's fair to say that cigarette volumes are getting worse?

And then in Spain, I think you reported cigarette market volumes down 15%.

It was one thing about the shape of the quarter and the underlying decline in this market.

I think France is toward the end of the year last year with the price increase in France.

The market is in recovery, although I have to admit the markets in France are not the most encouraging.

The unemployment and GDP et cetera are not necessarily going in the right direction.

Spain also had the beginning of the year price increase.

Nearly January I think it was a $0.15 price increase in Spain.

We'll have to await presently a few months to see how the situation will observe.

As I said, this is all both France and Spain and as we see today all in my sort of forecast, or estimate for the total market decline for the EU to be brought in the range in the last year.

Italy, I will repeat it as well, only country and the main country which I have on the watch lease in regards to the VAT.

Okay.

And secondly, you mentioned that we should expect some trading inventory distortions in the second quarter.

Could you just elaborate on that to help us with our models?

Please?

I think it would be mainly in Asia and mainly still in Japan.

As I think last quarter when we revealed our inventories to the safe level, what we require -- what we regard as a safety level for the Japanese market took place in the Q2, if I remember properly, of last year.

Thank you, very helpful.

Thank you.

At this time, there are no further questions.

I will now return the call to Nick Rolli for any closing remarks.

Thank you very much.

That concludes our day today -- our call today.

If you have any follow-up questions, the investor relations team is here.

The phone numbers are available on the press release.

Again, thank you very much for joining us today.

Thank you for participating in the Philip Morris International first quarter 2013 earnings conference call.

You may now disconnect.