菲利普莫里斯國際 (PM) 2013 Q4 法說會逐字稿

Good day and welcome to the Philip Morris International fourth-quarter 2013 full-year earnings conference call.

(Operator Instructions).

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

Please go ahead, sir.

Thank you.

Welcome.

Thank you for joining us.

Earlier today we should a press release containing detailed information on our 2013 fourth-quarter and full-year results and you may access the release on our website at www.PMI.com.

During our call today, we will be talking about results for the fourth quarter and full-year 2013 and comparing them to the same periods in 2012 unless otherwise stated.

Our references to PMI volumes are to PMI shipments; industry volume and market shares are the latest data available from a number of internal and external sources.

Net revenues exclude excise taxes, operating company's income, or OCI, is defined as operating income excluding general corporate expenses and the amortization of intangibles plus equity income or loss in unconsolidated subsidiaries net.

Our OCI growth rates are on an adjusted basis which excludes asset impairment, exit and other costs.

Data tables showing adjustments to net revenues in OCI for currency, asset impairment, exit and other costs, pre-cash flow calculations and adjustments to earnings per share or EPS, as well as reconciliations to US GAAP measures are 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 Andre Calantzopoulos, our Chief Executive Officer.

Jacek Olczek, our Chief Financial Officer, will join Andre for the question-and-answer period.

Andre?

Thank you, Nick, and welcome ladies and gentlemen.

As expected, we finished 2013 with a strong fourth quarter.

While our cigarette volume declined by 1.9% excluding the Philippines, our net revenues in adjusted OCI increased by 2.5% and 12.7% respectively excluding currency.

Most importantly, our adjusted diluted earnings per share grew by 19.4% on an ex currency basis.

Our results were strong across all four regions.

Adjusted OCI excluding currency increased in the fourth quarter by 2.6% in the EU region; 22.5% in EEMA; 7.4% in Asia; and by 34.9% in the Latin America and Canada region.

On a full-year basis, EEMA and Latin America and Canada grew adjusted OCI at a double-digit rate in 2013 excluding currency.

For the full-year 2013, our reported diluted EPS reached $5.26.

This includes the $0.10 charge from the restructuring of our business in Egypt which we announced last week as well as $0.04 in charges that we had previously disclosed.

Consequently, our adjusted diluted EPS was $5.14 in 2013.

Excluding the unfavorable currency of $0.34 per share, this represents a growth rate of 10% compared to the previous year's adjusted diluted earnings per share of $5.22.

Currencies, particularly in emerging markets, continued to be extremely volatile.

At prevailing exchange rates, we project $0.71 in unfavorable currency in our EPS guidance for 2013.

Emerging markets account for nearly 60% of this total.

The fact that we are currently hedged for approximately 60% of our forecast sales to Japan for an effective rate of JPY0.95 to the dollar is included in this projection.

Our results confirm that our business fundamentals are robust.

However, as I outlined in November, we expect to continue to face specific challenges in 2014 those affected our full-year 2013 results.

Furthermore, we intend to make significant investments in and increased expenditure behind our reduced risk products in preparation of [city] pilot test later this year and our first national launch in 2015 as well as additional investments behind our current portfolio.

Our reported diluted EPS guidance for 2014 at prevailing exchange rates is in a range of $5.02 to $5.12 versus $5.16 in 2013.

Our 2014 guidance corresponds to a growth rate excluding currency of approximately 6% to 8% compared to adjusted diluted EPS of $5.40 in 2013.

Japan is projected to remain a challenging market for us in 2014.

The government is increasingly the consumption tax in April from 5% to 8%.

The related retail price per (inaudible) is around JPY14 per pack.

We have applied to the Minister of Finance for approval to increase the prices of our Marlboro, Lark and Philip Morris brands by JPY20 per pack and other brands by up to JPY10 per pack.

Subject to approval by the Minister of Finance, the new prices are expected to take effect on April 1.

The new prices are expected to result in a slight acceleration of the total market decline to around 3% to 3.5% in 2014 compared to 2% decline of 2013.

Our overall market share declined in 2013 from 27.7% to 26.7% and to 25.9% in the fourth quarter.

This was driven principally by the success of new competitive products in the menthol segment and was somewhat distorted by the pipelining of competitive product launches in the fourth quarter.

Marlboro remains resilient and should be boosted by the rollout of the Don't be a Maybe Marlboro campaign.

It has been successful in numerous markets in the European Union and other regions.

We also have plans to introduce various new product offers under the Marlboro and Lark trademarks.

Barring an unforeseen adverse competitive price reaction, we expect that these launches coupled with increased spending to support them should enable us to stabilize our market share during the year.

However, we do expect that our 2014 average share will be below the 2013 average.

The second challenging market in Asia is the Philippines.

We estimate the local manufacturing Mighty Corporation is producing about double the volume that is declared to the Bureau of Internal Revenues.

This has prevented us from being able to operate on a level playing field and continues to result in a significant tax revenue loss for the Company.

A planned implementation of a system of fiscal stamps in the second quarter this year will hopefully help to address this issue.

We are continuing to encourage the authorities to act decidedly and welcome the decision of Congress to hold hearings on this matter as well as the decision of the Bureau of Customs to suspend the license of Mighty Corporation to operate a customs-bonded warehouse.

Since the end of November, we have seen the Mighty brand stick price gradually rise from PHP1 to PHP1.50 and the Marlboro's brand stick price rise to PHP1.25.

This is a positive development.

However, the Marlboro's brand is still selling at a wholesale price of PHP183 per carton which is below the PHP119 required merely to cover the new excise tax and VAT both as of January of this year.

We do not know at this stage how Mighty Corporation intends to reflect the new tax levels.

On the demand side, the good news is that while tax paid industry volume was down by 15.6% to an estimated 86.3 billion units in 2013, Nielsen data indicates that there was only a minor decline in actual consumption.

Adult smoking instances and adult daily consumption remains at similar levels in the second half of 2013 to those that prevailed in 2012.

In light of the significant tax driven price increases incurred by Marlboro and Fortune, total consumption was sustained by adult smokers down trading to the then PHP1 per stick pricing.

The super low price segment increased its share from 17.1% in the fourth quarter of 2012 to 41.2% in the same period in 2013 mainly at the expense of the premium and midpriced brand.

While we have enforced our segment participation, our overall market share in the fourth quarter declined by 14.9 points to 72.3%.

Our ability to enhance our profitability through higher prices remains constrained by the flexibility that Mighty Corporation derives from its tax under declaration.

In the meantime, the investments we are making to defend our business are shared with our partner.

We continue to hold a clear leading share in the market where annual adult consumption is estimated at around 100 billion units and we have the brand portfolio and the national distribution to take advantage of the planned future tax equalization.

We thus remain optimistic that once the current hurdles are overcome, the Philippines will be a significant contributor to our profit growth in the region.

While discussing Asian markets, let me provide an update on Indonesia where total industry volume increased by 1.9% in 2015 to an estimated 380 billion units.

The slower industry volume growth can be large part attributed to the economic slowdown and the impact of higher fuel and food prices on lower income of our consumers.

In fact during 2013, the volume of premium and midpriced cigarettes increased by 5.2% and 3.4% respectively, while the volume of low-priced brands declined by 6.6%.

In 2014, we expect industry volume growth to moderate to around 1% due to the weaker economy and expected significant price increases in the low price category following the introduction of the new regulation, restricting the preferential tax treatment of so-called sister companies.

In 2013, our market share grew by 0.5 points, 36.1% driven by the strong performance of our lighter tasting machine made Kretek brands, Sampoerna A and U Mild, as well as by Marlboro in the [white] segment.

The fourth quarter where share growth was more than offset by weaker performance of our hand-rolled Kretek brand, Dji Sam Soe and Sampoerna Kretek, due to the segment's decline and the fact that they both sell currently at disadvantaged price points compared to competitive brands.

In 2014, we expect to benefit from the continued growth of the lighter tasting machine made Kretek segment which increased by 1.9 points to 40.5% last year and in which Sampoerna A and U Mild have been growing 46.4% segment share.

In addition, we are gaining share in the full flavor machine made Kretek segments with Dji Sam Soe Magnum.

Finally, we believe that the government's introduction in January of a regional tax of 10% should be manageable as it equates to a pass-on of between 3% and 6%.

Let me now turn to the European Union region.

In the fourth quarter, cigarette industry volume in the region declined by 5.8%, a rate of decline similar to the third quarter reflecting a tangible moderation compared to the trend we witnessed in the first half of 2013.

Illicit trade appears to have stabilized albeit at a high level.

The expansion of the fine cut category have slowed given the compression of the tax and price differential with cigarettes.

Finally, while still expanding in some markets such as France, Spain and the UK, the growth in demand for electronic cigarettes in the region as a whole has decelerated.

We therefore expect cigarette industry volume trends to show an improvement compared to the 7.5% decline in 2013 and are currently forecasting a decline in 2014 in a range of 6% to 7%.

The improvement has taken place in an environment where excise tax increases have been reasonable and structural improvements continue to take place.

The one market of concern is Italy, where the predominantly ad valorem structure is encouraging the growth of the super low EUR4 per pack price segment and eroding the tax revenue base of the carton.

We hope that the Italian government will rapidly address this issue and implement the necessary tax reform.

Until this materializes, we will prudently balance the delicate price, volume and profit equation in Italy.

In 2013, we increased our overall market share in the European Union region by 0.5 points to 38.5%.

This was driven by the strength of our brand portfolio with Marlboro, L&M, Chesterfield and Philip Morris all gaining share in the region.

We expect this momentum to continue and our market share grew further to 38.6% in the fourth quarter.

Our share gains are very broadly based.

We increased our market share in each of the six largest cigarette markets by volume for full-year 2013.

Our continued share momentum positions us well for 2014 when we expect to be able to again outperform the (technical difficulty).

I would also like to highlight the strong performance in the EEMA region, notably in Russia.

Our strong pricing actions enabled us to continue to significantly expand our profitability in 2013 even though cigarette industry volume declined by an estimated 7.6%.

Despite the slower implementation of new retail prices by some of our competitors, we recorded only a modest share decline of 0.3 points 26.1%.

This was achieved in particular by the continued outperformance of above premium priced Parliament.

In January this year, the government implemented the next planned and largest excise tax increase resulting in an average pass on of RUB8 a pack.

In anticipation, we increased most of our maximum retail selling prices by RUB9 per pack in December last year.

Prices will only go up at retail later this month.

For the full year 2014, we expect to continue to expand our profitability at the high single-digit rate even though cigarette industry volume is expected to decline by between 9% and 11% reflecting price elasticity, illicit trade and a weaker economy.

Cigarette industry volume in Turkey was impacted by significant trade loading at the end of 2012 and by an increase in illicit trade in 2013.

As a result, industry volume declined by an estimated 7.6% last year while we estimate that the underlying decline was approximately 3.5%.

Provided there is no further increase in illicit trade, we expect underlying cigarette industry volume to stabilize in 2014.

Our share has remained resilient in the face of increased price competition in the low and super low price segment with a decline of just 0.2 points to 45.5% in 2013.

We successfully line-extended Chesterfield into the super low price segment and continue to improve our mix thanks to the success of Parliament in the premium and Muratti in the mid-priced segment.

This January the government increased the specific excise tax and the minimum tax while maintaining the ad valorem rate that changed.

This resulted in a pass on of around [TRL0.28] per pack at the retail level.

We increased the prices of our brands by around and half a lira on average thus boosting our unit margin.

We achieved strong results across our Latin America and Canada regions with share gains in Argentina, Brazil, Canada and Colombia and a stable 73.5% market share in (technical difficulty).

Looking at our top 30 OCI markets worldwide, we increased our share in 2013 by 0.5 points to 34.9%.

Our market share grew or was stable in 23 of these markets further emphasizing that our underlying business remains strong.

Marlboro has been a key driver of this excellent share momentum.

In 2013, excluding China and the Philippines, Marlboro gained share in all four regions with a particularly strong performance not only in the EU region but also in the Latin America and Canada region and across North Africa.

Our strong market share momentum should enable us to improve our volume performance in 2014 and outperform the industry.

In 2013, we estimate that global cigarette industry volume excluding the USA and China declined by 3%.

This year we are forecasting a decline in the range of 2% to 3%.

Pricing was the key driver behind our income improvement excluding currency in 2013.

We achieved a pricing variance of $2.1 billion.

This was above our historical average reflecting the timing of tax driven price increases and unusually large gains due to inventory movement most notably in the Philippines.

In 2014, we expect these gains to be lower.

Consequently the first quarter's EPS growth rate excluding currency is expected to be below our average for the year.

Please note that as of today, we have implemented or announced almost 6% of the pricing that is built into our 2014 earnings per share guidance.

While revenue growth remains a key driver of our business growth, we continue to be very focused on cost controls and productivity gains.

Our adjusted OCI margins increased by 0.6 points in 2013 excluding currency from 45.4% to 46%.

This is in part attributable to the successful completion of cost savings and productivity improvement programs which generated over $300 million in 2013.

We target a further $300 million in annual productivity gains in 2014 which should moderate inflation rate input cost increases.

We have recently completed four business development projects that will be accretive to earnings in 2014.

We repurchased the remaining 20% shareholding from a business partner in Mexico.

We took a 49% participation in our investors DA, which is involved in the manufacturing and distribution of international brands of cigarettes in Nigeria.

We purchased a 20% shareholding in a Russian distributor, Megapolis.

And finally, we have restructured our business in Egypt to enhance our growth and income potential in this 80 billion unit market.

These business development projects are expected to have a net positive EPS impact of approximately $0.10 in 2014.

In 2013, we increased our free cash flow excluding unfavorable currency by 11.8% to $9.4 billion.

As foreseen, the growth rate exceeded that of net earnings driven largely by a reduction in working capital.

In 2014, we expect free cash flow to be unfavorably impacted by currency and the foreseen increase in working capital at the end of this year attributable to the timing of excise tax increases and related inventory.

We remain committed to generously rewarding our shareholders through a combination of dividends and share repurchases.

In September last year, we increased our dividend by a further 10.6% bringing the cumulative increase since 2008 104.3%.

Our target dividend payout ratio remains an attractive 65% and our dividend yield last Friday was 4.8%.

Last year we spent $6 billion to repurchase 67.2 million shares.

We also spent over $2 billion on the four business development opportunities that I described.

As a result and given both the projected significant unfavorable currency impact on our reported results in 2014 and the fact that we are approaching the high end of the ratio supporting our credit rating, we are scaling back our target share repurchases in 2014 $4 billion.

Please note that the rating agencies use different methodologies some preferring to use gross rather than net debt measures, some awaiting the company's cash position differently from others.

As we emphasized last November, 2014 is going to be a pivotal year for reduced risk product, our greatest growth opportunity.

Last month we announced that we are building a new manufacturing facility near Bologna, Italy but along with a pilot plant in the same area, we provide an annual capacity of up to 30 billion units.

The associated capital expenditures of up to EUR500 million are within the previously disclosed range of EUR500 million to EUR600 million.

This year we will obtain the results of the clinical trials that we started in 2015.

The data from these studies will be an essential part of an evidence package to substantiate the use of our platform one product resulting in a biological impact -- a biological impact profile close to that of cessation.

During the first half of this year, we will continue with our perception and behavioral studies and finalize the packaging and labeling anticipation of one city pilot test in the second half of 2014 and our first national launch in 2015.

In addition, we plan to enter the electronic cigarette market during the second half of 2014.

As previously disclosed, we will increase our reduced risk product related expenditures in R&D, operations and commercial activity by more than $100 million this year in order to meet this accelerated schedule.

In conclusion, 2014 will be a very important year as we increase our investments behind both our conventional and our reduced risk products.

The outlooks for the Philippines and for the EU region as a whole is improving but Japan remains a significant challenge.

We enter 2014 with robust fundamentals and good market share momentum behind our superior brand portfolio led by Marlboro.

In addition, our profitability will benefit from the four business development projects that I outlined.

However, currency volatility in emerging markets has increased significantly and we are only one month into the year.

Our expectations is that we should be able as of 2015 to meet our annual currency neutral net revenues and adjusted OCI target.

Of course the level of our share repurchases will depend on the impact of exchange rate, interest rate environment, corporate tax reforms here in the US.

There are a number of important factors that underpin our belief.

Sequential improvements in the performance of challenging markets in particular in the Philippines; Federal structure improvements in excise tax systems notably in the EU region; a superior brand portfolio led by our invigorated Marlboro; strong pricing power based on our brands; an increased focus on cost controls and productivity gains and our commercialization of reduced risk products.

Finally, our strong free cash flow will be used to reward our shareholders with general dividends and share repurchase programs.

Thank you.

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

(Operator Instructions).

David Adelman, Morgan Stanley.

A couple of quick things, Andre.

First, on the dividend, it is obviously a Board decision but do you think there is a willingness this year to further take the payout ratio above the 65% target so that there could be dividend growth?

David, you said it yourself, it is a Board decision.

However the Board takes into consideration a number of factors, 65% target being one and clearly if you look at our history, we have a history of rewarding generously our shareholders even in turbulent times.

That is all I can tell you.

And then Andre, in the Philippines, you gave a lot of statistics and data but could you explain -- if you don't look necessarily at declared tax volume by your competitor, what really ultimately matters to you is what is being reflected in the marketplace in terms of competitive pricing.

And if you were to benchmark Mighty's price point versus Marlboro or Mighty's price point versus Fortune, how much progress has there been made, how much more evident does it appear as if there is competitively reflecting reality?

David, clearly there is an improvement as I also said in my remarks.

Clearly we have seen the price of the Mighty brand represent [70%] of the portfolio of Mighty Corporation going up to PHP1.50 although the price per carton does not yet reflect the second excise tax increase, we speak about reasonable economic returns.

What has also happened is they left behind one of their brands called Marlboro, that represents 30% of their portfolio and roughly 6% to 7% of the market and until this brand also goes to the right price point and price gap, clearly we are also obliged to maintain some presence in the segment.

In summary, this is all about achieving the right price gaps, as I have previously explained, but in general to fix the price gaps either you do it from the top or from the bottom.

It appears that some progress is made to achieve this from the bottom.

We need to wait until the new tax is reflected across the Mighty Corporation portfolio and then as I said, there may be some upside in there.

They are still under declaring from what we understand (inaudible) and tax stamp (inaudible) a very large part, roughly half of their volume which helps them subsidize the lower price.

So -- but there is progress.

There is increasing pressure on them -- hearing in the Congress and also the fact that they lost their bonded warehouse which we understand they were used to declare the products on the raw materials not for export but essentially being used locally, so the pressure is mounting.

So we are kind of optimistic but we will know better as the year unfolds.

Also to say if we look at the outlook for next year, clearly I think in terms of the Philippines probably reach the bottom of a negative impact and we can only grow better next year both in comparative but even in absolute terms.

Great, thank you.

Chris Growe, Stifel.

Good afternoon.

I wanted to ask you first, Andre, in relation to the Philippines and having the government pressuring the Company and obviously the price point still being too low but can you give us information about the warehouse being shut down or taking the license away, is that not forcing like a more immediate movement by the company to raise prices at retail if that is not happening as quickly as maybe you thought it would?

A difficult question to answer.

Yes, the pressure should be there because it is becoming extremely visible to the general public and the media.

So we should expect some move but we need to see this move, that is all.

Now the other limitation on the Philippines I explained a previous time is that if over the long term, the tax system clearly is relaxed in our favor because it closes the gaps top to bottom and normal operating market and also allows us as the two (inaudible) equalize to unleash a bit more pricing power in the mid-priced brands.

Because today the mid-priced brands are bound by the way the excise tax or the price for the different excise tax payers is calculated which is you take the retail price, you remove VAT in the excise tax and the government ignores completely the retail margin which as we know is pretty hefty, it can get up to 20%.

And that is the price, the net (inaudible) price that determines the price tier in which you are classified and which to be very careful how much pricing you can take, for Fortune for example, not to jump in the upper tier.

As the two tiers close over time in one or two years, then you have much more pricing power from that perspective.

Another development also that is positive in the Philippines -- good at least -- is that there will be tax stickers implemented towards the end of the first half of the year.

We will have to see how this impacts Mighty but definitely is another positive development.

So that is why longer-term we are very optimistic about the Philippines but still this year it has the impact I described on our profitability was about 1 [growth point].

Okay.

That is the color, thank you.

I just had a quick follow-up question for you on Japan.

I understand that you are calling it still a significantly challenged market was the term you used.

It seems like you are going to get some pricing through -- I just want to be clear is that going to be more than the tax increase and if that is the case even if volumes declined a little bit more than the 2% underlying rate, wouldn't that make for a better Japan in 2014 maybe than what you assumed before?

This is very early days in Japan.

We have submitted our request to the Ministry of Finance.

It is subject to approval by the Ministry of Science.

If that holds and we hope it will, yes, it will give some positive pricing in Japan.

However, we need to put this in the context of that depends also what other competitors are doing of some additional potential impact on our share and also the fact that we may need to put some promotional additional money to support that price level.

So again, it is early days, it is subject to approval by the Ministry of Finance but there is some small upside over there.

Okay.

Thank you very much for the answers.

Judy Hong, Goldman Sachs.

So, Andre, we can appreciate the fact that you are willing to invest some more into the business in 2014 to compete more effectively in some of your challenged markets.

If I take a step back though, one of the drivers that is causing you to perhaps spend a little bit more is maybe the emergence of some of the newer competition whether it is the local discount player like Mighty or JTI getting more aggressive in Japan or you've got the illicit trade that has picked up.

So I just want to get your perspective on why you think you are confident that the spending are making in 2014 is really enough to put you in a position to compete more effectively to drive the Company to grow in line with your long-term target in 2015 and beyond?

First of all, the investment as we described, one part is growing behind our reduced risk product . And clearly this is longer-term as we will start seeing some volume in these products.

Now regarding the existing business, of course there is need for investment in Japan, and that is also to support our product introductions -- maybe Marlboro campaign -- and other initiatives that I described.

In some other markets where business needs are ramping the investment, for example, Indonesia, that is part of our normal business spending.

Now clearly the investment in the Philippines is another type of investment.

It is not a promotional or marketing investment; it is more investing in our margins by holding the right price gaps.

And that is where the big investment is.

As I explained this one, I believe this year clearly we see the bottom of the problem, and we can grow significantly out of this.

Just remaining flat year-to-year in the Philippines in terms of profitability will increase by 1% growth.

It's a swing of two growth points.

I think also that for 2016, one element is that our cost base in terms of manufacturing cost will gradually improve.

Already if we see the growth of our manufacturing cost, it was 3.8% in 2013.

It went down to -- it is going down to 3.2% this year and will further decrease next year, and that is a positive addition.

The conditions in Europe I think will slightly improve.

We still have strong price space, and we have a number of portfolio initiatives including new initiatives in Marlboro that I will describe in more detail in CAGNY.

All that makes me fairly confident that after 2015, we can reach our revenue and operating company income target.

And I don't give and take into consideration Japan, which can certainly improve compared to the impact we have this year; as we are lapping the years where the actual product introductions happened in Japan and where Japan tobacco bought their fair share of excitement, in which I remind everybody they were not existing before.

Thank you.

And then just on the share buyback outlook for 2014, I can appreciate you are sort of looking at the rating agencies and the metrics that they looked at.

We also looked at your stock price and valuation and it seems like really an opportune time if certainly if the fundamentals are improving as we expect them to that it might be more of an opportune time to get more aggressive on the buyback.

So I would just want to understand your thinking process on the moderation in terms of the buyback.

Is it really the currency issue, are you willing to take on more US dollar denominated debt to kind of fund the buyback?

What is sort of the thinking process there?

Currency clearly plays an important role here.

Different agencies look at ratings in different ways as I said ranging from total debt to EBITDA to net debt or adjusted net debt.

And one element in the adjusted net debt is that rating agencies start taking cash (inaudible) at a discount because applying a theoretical -- say corporate income tax rate if that cash were to be repatriated in the US.

So that reduces the capacity and you can do the math very easily yourself.

The currency impact we just announced at prevailing rates if that is to stick for the year, it is -- at the cash flow level is roughly $1.1 billion and at your EBITDA level is $1.35 billion, $1.4 billion so that takes a lot of share repurchase capacity out and as the year unfolds, we need to reevaluate the situation.

So the other thing we need to note is we have $2 billion of business development projects that we just accomplished and frankly speaking, they are much more accretive to the shareholders than the share buyback.

The $2 billion -- that's the $0.10 accretion that you called out in the --?

It is net.

It is the net, okay.

It is the net of the impact it has on the lesser share repurchases.

Understood.

Okay, got it.

Thank you.

Jon Leinster, UBS.

Good afternoon, gents.

Just to follow on, just to clarify again I apologize for this on the share repurchase, when you say getting towards the high end of your ratios with the credit rating agencies, do you mean that by the end of 2014 you will be toward the high end or currently and therefore in essence you are flagging that perhaps in 2015 that they will have -- the cash returns will have to be more in line with cash flow and leverage held sort of more flat in 2015.

Is that a reasonable assumption?

Well, first of all, our current ratios are already close to the upper end and had we continued with the 6 billion share buyback we would have exceeded the ratios during the year if the currencies remain where they are today.

So this is one of the reasons because what we always reiterate is that we want to absolutely maintain our rating we had to moderate our share repurchase forward.

Now looking at 2015, it is a bit early days to say exactly what the target share buyback is going to be.

I would like to see how this situation on the currencies unfolds during the year and then we will take a decision later on.

It is a bit early to call it.

Clearly we are committed to share buybacks and the corridor in which we operate is on one side the credit rating upper limit and on the other side, 100% cash outflow to our shareholders through dividends and share buybacks.

And we will always operate within that corridor in the future.

That depends on currencies, interest rates and longer-term tax reform in the US, I'm stating the obvious.

But you are going to maintain that credit rating?

Yes.

Secondly, the Latin America and Canada region in the fourth quarter looks very strong profit performance in the fourth quarter.

Is there anything, can you detail anything in particular that is behind that?

A particular market?

It is a bit across the market and it is also depending on the timing of price increases in Argentina.

As you know, Argentina is an inflationary environment and we need approval from the ministry of Finance all the time, Minister of Economy.

So sometimes you have a delayed approval and that is partially what happened also in that quarter because we got the approval later than -- so we had to time differently the price increases.

That is nothing to point.

Lastly, just on the EU, if the EU volumes are down 5.5 or thereabouts in the second half of 2013, why do you expect to get somewhat worse in 2014 sort of 6 to 7?

This is the best we can see today.

There is still some pricing that has to take place.

The situation clearly looks slightly better these last two quarters and I hope it is going to be confirmed in the first quarter 2014.

So that is the forecast to the best of my knowledge today.

Right, but there is no change in terms of -- there is no obvious signs that the governments particularly in Southern Europe are cracking down or illicit or something has changed in the market?

We don't have the latest, latest figures of the global survey in the European Union but what I hear from the different markets, it seems to have stabilized.

Clearly it has improved in Italy, slightly up in France but visibility, overall the base remains high.

So I think that this doesn't get worse during the year and frankly we will not have disruptive taxes in the European Union, maybe we will be slightly better.

But today I cannot confirm that.

I want a quarter more to be in a position to confirm.

Okay.

Thank you very much.

Erik Bloomquist, Berenberg.

Good afternoon.

Firstly, with respect to the foreign exchange headwind, could you break apart in that 13% or $0.71 how much is transactional and within that, how much is related directly to Japan?

With respect to the transactional component, at prevailing rates, is it fair to think that that would disappear in 2015?

Okay.

I can't give you the absolute precise number for the breakdown between but between translation, I think (inaudible) 20.

But Jacek is here, he can give you a breakdown (multiple speakers).

Andre is right.

Last year, about 80% of our impact was stemming from the translations and the remaining 20% was the transaction.

With regards to the impact in our $0.71 per share currency impact, about 30% of the $0.71 versus the last year is coming from the yen and 70% is essentially across all currencies and there is a strong impact coming from the Indonesian rupiah, the ruble, Turkish lira, and a number of other currencies.

Okay, thank you.

And then with respect to the plain packaging, I was just wondering if you could comment on an article that appeared in The Scotsman, suggesting that PMI was suggesting if plain packaging was passed in Scotland, that country could be liable for GBP500 million in compensation for the intellectual property.

I was wondering what does that imply then if plain packaging goes forward in markets like Ireland and the UK, can we gross up the amounts that might be expected based on the volumes there?

And then just wondering what the status was of the WTO challenge and the BAT arbitration?

Thank you.

The article you are referring to I have no idea.

Frankly speaking, it is pure speculation because I haven't seen or articulated any related number.

First of all, we are far away from being in the situation as you know both in the UK and Ireland.

It is just political talk for the time being and I don't see any new evidence that has appeared on the horizon to justify even the UK reopening the issue.

Now coming to the real concrete case we have in front of us which is Australia, if you look at the facts in Australia, that plain packaging has no impact on prevalence or incidence after a year it is in the market.

I don't know where you can find stronger evidence about the impact.

Yes, we see a little bit of down trading but we had foreseen this and that is part of what we explained in the BAT case.

Regarding the cases, WTO is proceeding and the BAT case if I am not mistaken, a first hearing after submissions of written arguments from both parties is toward the end of February actually this month.

So we will see how this unfolds but as we always said, this is not a process that is going to take months, it is going to take still a year and a half, two years.

Okay, thank you.

My last question then was with respect to illicit and I was just wondering -- I appreciated the comments on illicit in Europe but how would you characterize it globally for PMI's markets?

And related to that, what are the prospects for recapturing illicit volume and what are the factors necessary for that?

Thanks.

The only outburst of illicit is clearly the Philippines and I think I have explained in length the situation.

We are all aware of the problem but that's illicit trade in a different form and that is a form we see increasingly in some places.

And that is probably the form and that is the easiest to find and to address because it takes action from the government.

It has been a painful process in the Philippines but that can be addressed.

For the rest of the illicit trade which is essentially illicit wide, I think we are making -- we always said that the best way to address this is for the supply chain and especially el (inaudible).

I think we are making very good progress in that area, not yet done but the progress, the awareness amongst the companies that produce (inaudible) and their efforts, I am fairly confident and hopeful that by the end of the year, we will see tangible results.

And that is one of the best ways to tackle the illicit trade.

I think that our prospects to reduce the illicit trade, our objective is over the next one to three years to stabilize it and we are working with many governments as you know around the planet to achieve this and then gradually reduce it and even stabilizing it is a great thing to achieve.

Thank you.

Thilo Wrede, Jefferies.

Good afternoon, everybody.

Andre, I think at this time last year you had already 75% of the pricing that you needed for your guidance take and you just said that you are now at 60%.

Can you give us the details why it is so much lower?

Just timing of things.

Nothing particular that I can point to.

As we said last year, we had a bit more of inventory movement in the Philippines that was lower this year because the tax increase was lesser.

That is one thing.

And the rest is pure timing.

Indonesian, is every year the same and we start with the tax at the beginning of the year and gradually increase.

So nothing particular to worry about.

So we shouldn't read into it that you are maybe taking a more cautious approach to your pace of price increases?

No, I think our pricing policy is that it is important to take a lot of factors into consideration -- affordability, price gaps, excise tax and our pricing is every year very strong and I think I explained in my remarks the slight differences compared to this year.

Okay.

The other question I had in your conclusion of your prepared remarks, you pointed out that you expect to get back to your normal growth rate for revenue and operating income in 2015.

You didn't mention EPS, is there a reason for that?

It is -- EPS depends on our share repurchases and that is the breach and I explained what are the driving factors behind our decisions in share repurchase.

So in any given time, we may be slightly above or slightly below that breach and as I said, it is too early to call next year.

Understood.

Okay, that is all I had.

Thank you.

Michael Lavery, CLSA.

We have covered the Philippines fairly well but I just wanted to get more question on that about the Marlboro flavor code launch ended now.

Have you seen that have a big impact there?

Is it helping drive share?

What is your thinking about how that is positioned and how it is working so far?

Early days.

The launch is both tactical and strategic so it is not meant yet to be expanded so we will see how it reacts there but that is kind of hedging also the price gaps in the Philippines.

Thank you.

That is helpful.

In terms of margins or the cost structure, how different is it and what kind of impact is it to the mix of your business?

I can't answer about the margins.

The margins are not very different but this is a very small volume.

So I don't think that impacts our margins.

Because (inaudible) in the Philippines as I said, I am maintaining artificially low price for a period of time brands like Jackpot for example, where we have to subsidize to a large degree the excise tax.

And that is much more impactful and if we correct this that will swing the profitability much more than Marlboro flavor code.

Okay, thank you.

And then just looking at Indonesia in 3Q when the inflation pressure on the consumer was the strongest and the category growth was the weakest, you gained share sequentially in year-over-year even despite having such a premium SKU to your portfolio.

Can you describe what changed in 4Q that it would have gone down and what does it look like going forward if there are some new competitive launches that are driving it or what are the big factors there?

I think the important thing is the performance as I said in my remarks of Dji Sam Soe and Sampoerna, the two hand-rolled Kretek brands.

But crossed during the middle of the year the price points and competitive brands in the same category have not yet crossed that point.

I don't know exactly their pricing but logic says that during the second half of this year, they should cross that point and that should help our share.

The other brands in the portfolio are doing very well.

As I also said, we are increasing the marketing support of the brands so I'm fairly optimistic about the share situation in Indonesia.

But is it likely to have pressure in 1H 2014 driven from those two brands until the price gaps -- until the price points on competitors cross some of the same thresholds?

Sorry, I didn't hear the question.

You said that the competitors' price points are likely to catch up crossing some of the same thresholds in the second half of this year.

So is there likely still a lot of pressure in the first half?

How do you see that playing out?

I don't know how competitors are pricing and I cannot predict this obviously.

But Indonesia in general has the tradition is as I explained previously at the beginning of the year, price is covering the excise tax increases and as you get net pricing during the year, you always have gradual pricing in Indonesia during the year.

So as the year unfolds, we have our plan for pricing.

I would expect also given excise tax and continuous pressure from the class, that other manufacturers are going to have a similar approach.

So yes, we will be some probably under some pressure for the next few months but overall, we can see moderate share gains during the full year.

That is helpful.

Clove prices I know were an issue last year.

They are not -- there is not a whole lot of visibility on those but it does look like they are down from peak levels pretty nicely.

How are you position there, is that a tailwind in 2014?

I wouldn't they are say lower in rupee terms.

Cleary with the devaluation, in dollar terms they have come a little bit down.

Now the [bushels] have been in the market.

We are quite I would say lucky this year that we have the second year of a very decent crop.

But if you look at the impact on us, we had a very big impact on our costs in 2012.

2013 is going down and as we annualize the inventory replenishment, the impact is going to be even lower in comparative terms next year.

So we see our other price -- (inaudible) price is going down.

Okay, that is great.

Thanks.

And then just back to Japan pricing, could you give a sense -- I know you talked about how it looks like that the applications you have put in should give some net pricing.

What is the split in the portfolio?

Is my math about right that that would be around a 4%-ish increase?

And if so, how much of that do you see maybe being at risk of trading down?

What kind of net -- if your applications are approved, what kind of net pricing do think you might realize?

Yes, day one if we do the math, it is around 4%, you are right.

But then the way also the Minister of Finance is looking at areas but then the result is going to be including share, some downtrading from that portfolio, so as I said previously, there will be some share movement.

And as I also said, we will put some additional promotional money for a period of time but overall if these prices are accepted, we will have some net positives.

Okay, great.

Thank you very much.

Vivien Azer, Citi.

My first question has to do with Indonesia.

I think it seems reasonable enough to expect that that market will decelerate a little bit further into 2014.

But can you offer a little bit more detail about how you are thinking about the macro landscape in that market just to give us comfort on that plus one given the challenges you had with guidance in that market last year?

And specifically, are you expecting a reduction in the subsidy for fuel because there is some chatter about that in the market?

Okay.

The positives about Indonesia is that it has positive demographics and also I think long-term, the country has a lot of potential and it would seem that there is uptrading this year -- last year and I expect uptrading to continue this year.

We have some particular issues.

The first one is the disappearance of the low tax tier in a shortcut we call the sister companies, that has a 3 billion cigarette impact on us and we have discontinued these brands actually.

But other competitors are much more affected and clearly either you discontinue these brands or you take very substantial price increases which I think it is reasonable to assume it will have some impact on total market this year.

This is one of the key factors why we have predicted -- it is a prediction of 1% total market growth.

The other one is the devaluation of the currency is bringing inflation and many of the goods in Indonesia including fuel are important.

So we are seeing some inflation happening that again unfortunately hits the low end consumers.

So if we see some deceleration is at the low price segment and these are the factors that I can describe today but long-term, as I explained, I think the country has tremendous potential.

Understood.

So just to clarify, embedded in your guidance is there no expectation for a change to fuel subsidies, it is just the inflation?

I mean to be honest with you, Vivien, I don't think the fuel subsidies action (multiple speakers) because I don't know how to factor them in but I'd try to bake in all of these factors I described and that is our best guess we have.

Okay, that is reasonable.

It is complicated math to be sure.

Turning to Russia really quickly, you called out price elasticity as one of the factors driving the 9% to 11% and I just wanted to clarify is it just normal price elasticity or is it a change in price elasticity in Russia that is causing your outlook for a down 10% for industry volumes at the midpoint?

I think if I recall correctly, we took a slightly higher price elasticity given the magnitude of the increases.

We need to look at the history of Russia we have with the tax plan which is very welcome because it gives us predictability.

We had three subsequent years of very substantial tax and price increases so it is not only one year it is three years.

And I think it is reasonable to assume some higher elasticity.

Now whether 9% to 11% is the final number, we will see as the quarters unfold.

I want to remind you two things.

First, that this is the last year of large tax increases and we should be looking at a better tax environment although continuously predictable as of 2015 and beyond.

And secondly, despite this projected quite large volume decline, we also as I said in my remarks, foresee a pretty substantial profitability growth in Russia due to margin improvement.

Understood.

A follow-up on Russia, embedded in that outlook, are you seeing any negative impact of volumes from the implementation of wave one of the indoor smoking bans in that market?

Marginally it is always the case.

We have put this in our guidance obviously.

We also have as I explained previously this year the disappearance of (inaudible) kiosks where although difficult to say that this will have an impact on total consumption, we will have to see also what it really does in terms of impact on consumers but all this is part of our estimate.

Wonderful.

Thank you very much.

Ryan Oksenhendler, Bank of America.

Good afternoon, guys.

A question I guess going back to the long-term targets in 2015 and I guess even beyond that, in November you laid out the potential adult user base and margin potentials for reduced risk product.

When thinking about your growth targets for OCI because I guess EPS will be impacted by FX, but is getting back to the target growth rate contingent upon the success of reduced risk product or is that incremental?

If we look at 2015, clearly the contribution of reduced risk products is rather de minimis and we will be in investment mode because of the expansion of the introduction product of reduced risk product for the next two, three years.

So reality is for the time being the investment is going against our numbers.

So at least, once we come even and break even on this, the rest is incremental clearly.

As for the time being, we are negative on reinvestment and we appreciate that.

(multiple speakers)

You feel comfortable about your targets in 2015 and 2016?

Yes.

I will leave it there, guys.

Thanks.

That was our final question.

I would like to turn the floor back over to management for any additional or closing remarks.

Thank you very much for joining us.

That concludes our call today.

If you have any follow-up questions, the investor relations team is currently in New York and as Andre reminded you, our next presentation will be at the CAGNY conference on Tuesday, February 18.

Thank you again and have a great day.

This concludes today's Philip Morris International fourth-quarter 2013 full-year earnings conference call.

Please disconnect your lines at this time and have a wonderful day.