菲利普莫里斯國際 (PM) 2014 Q4 法說會逐字稿

Good day and welcome to the Philip Morris International fourth-quarter 2014 full-year 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).

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

Please go ahead, sir.

Welcome and thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2014 fourth-quarter and full-year 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 fourth quarter and full-year 2014 and comparing them to the same periods in 2013 unless otherwise stated.

A glossary of terms, data tables showing adjustments to net revenues and OCI for currency and acquisitions, asset impairment, exit and other costs 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.

Please note that Reduced-Risk Products, or RRPs, is the term we use to refer to products with the potential to reduce individual risk and population harm in comparison to smoking combustible cigarettes.

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's now my pleasure to introduce Andre Calantzopoulos, our Chief Executive Officer.

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

Andre?

Thank you, Nick and welcome, ladies and gentlemen.

We anticipated that 2014 would be a particularly difficult and complex year for PMI and have, in fact, characterized it as an investment year.

[Waiting] to address specific challenges in key markets such as Italy, Japan and the Philippines while also investing behind a number of strategic initiatives, including the pilot launches of iQOS, the rollout of Marlboro 2.0 architecture and optimization of our global manufacturing footprint.

In addition, we faced an operating environment of continued macroeconomic weakness and unprecedented currency headwinds.

Within this context, I'm very pleased to announce that we delivered a solid currency-neutral performance in 2014, achieving adjusted diluted EPS growth of 7.8%.

This result exceeded the 6.5% to 7.5% guidance that we provided last November due mainly to better-than-expected performances in the European Union and EEMA regions.

In addition, we made very substantial progress in addressing our specific key market challenges and successfully executed on our strategic initiatives.

As anticipated, our fourth-quarter results came in below our exceptionally strong performance in the fourth quarter of 2013.

In addition to this challenging comparison, the pattern of our expenses and the timing of key investments in 2014 were skewed towards the final quarter.

Our organic cigarette volume declined by 3.8% for the quarter due to lower total cigarette industry volumes and inventory movements in the Asia and EEMA regions, partly offset by marketshare gains in the EU and EEMA region.

Excluding the adverse impact of inventory movements, volume for the quarter declined by approximately 2%.

Net revenues increased by 1.1% excluding currency and acquisitions with favorable pricing across all regions that more than offset unfavorable volume/mix due principally to the Asia region.

Adjusted OCI declined by 10.6% on the same basis due mainly to the aforementioned pattern of expenses and timing of investments.

Fourth-quarter adjusted diluted EPS, excluding currency of $1.31, decreased by 4.4% compared to a 19.4% increase on the same basis in the fourth quarter of 2013.

Despite a historically high adverse currency headwind, we entered 2015 with strong business fundamentals and accordingly remain optimistic regarding our business prospects going forward.

Consequently this year, we are targeting currency-neutral annual growth, excluding acquisitions, of 4% to 6% for net revenues and 6% to 8% for adjusted OCI.

Our reported diluted EPS guidance for 2015 at prevailing exchange rates is in a range of $4.27 to $4.37 versus $4.76 in 2014 and includes an unfavorable currency impact of approximately $1.15.

This guidance represents a growth rate, excluding currency, of approximately 8% to 10% compared to our adjusted diluted EPS of $5.02 in 2014.

As I will explain later, our 2015 guidance includes incremental spending versus 2014 for the deployment of iQOS and does not include any share repurchases.

The $1.15 of unfavorable currency at prevailing exchange rate included in our 2015 guidance is driven primarily by the Russian ruble, the euro, the Japanese yen and the Indonesian rupiah.

These four currencies account for approximately 42%, 13%, 11% and 5% respectively or over 70% collectively of the total unfavorable currency [variant].

We have currently hedged approximately 60% of our 2015 forecast sales to Japan, which, at prevailing exchange rates, translates to an effective rate of JPY110 to the US dollar.

Let me now discuss our progress in some of our regions and key markets beginning with the marked improvement in the EU region.

Total cigarette industry volume was down by 2.4% in the fourth quarter bringing the full-year decline to 3.1%.

This represents a significant moderation versus a 7.4% decline in 2013, which we attribute to the subdued performance of the e-vapor category, less outswitching to fine cut products, a reduction in illicit trade in several markets and lower than historical average pricing mainly in Italy.

For 2015, we forecast a decline in cigarette industry volume of approximately 4%.

Our 2014 marketshare performance in the EU region was impressive with a gain of 1 percentage point to 39.9% in the fourth quarter and 1 point to 39.8% for the full year.

This result reflects share growth in all six of the regions' largest markets by cigarette industry volume, most notably in Italy and Poland.

In fact, our share gains in conjunction with the moderating industry volume decline resulted in essentially stable PMI cigarette volume in the EU region last year.

This is a remarkable achievement and by far the region's best cigarette volume performance since the spin.

Marlboro, L&M and Chesterfield were the primary drivers of our share performance in the EU region.

As of 2014, they represented the top three cigarette industry brands in the region by volume.

For the year, Marlboro share grew by 0.3 points to 19.3%, L&M by 0.2 points to 7.1% and Chesterfield by 1.1 points to 5.5%.

The performances of Marlboro in France and Spain, L&M in Germany and Chesterfield in Italy and Poland were of particular note.

For 2015, we expect the EU region to return to low single digit adjusted OCI growth, excluding currency and acquisitions.

The excise tax environment remains rational.

Our leading brand portfolio positions us well for further share gains driven by the continued rollout of the Marlboro 2.0 architecture.

In addition, pricing is expected to be stronger than in 2014 in part due to recently increased cigarette prices in key markets such as Italy, Poland and Spain.

Let me briefly discuss the UK government's recent announcement that it intends to proceed with the introduction of plain packaging.

We believe this decision is ill-advised and is not based on scientific evidence.

While we maintain an ongoing dialogue with regulators and hope that reason will ultimately prevail, we are prepared to pursue other alternatives, including litigation, to ensure the protection of our intellectual property.

Before closing on the EU region, I would like to touch briefly on Italy where the long-awaited tax reform was implemented last month.

As shown on this slide, it includes a shift to a more specific structure and a higher minimum total tax, both important steps in the right direction.

Reform also covered (inaudible) products with Marlboro HeatSticks now subject to a lower excise tax rate compared to cigarettes.

We entered the year with favorable share momentum driven by the strong performance of Chesterfield and in mid-January, we increased our cigarette prices by EUR0.20 per pack across our portfolio.

I will now discuss selected markets from our Asia region beginning with Japan.

Our strategy to stabilize marketshare last year was successful.

Key drivers were the launch of our Be Marlboro marketing campaign, the introduction of Marlboro Clear Hybrid and the strengthening of the Lark brand family through morphing and new launches.

We plan to maintain our focus on these two key brands in 2015 through a robust innovation pipeline as highlighted by the recent launch of Marlboro Fusion Blast, a menthol cigarette with two different capsules that provide novel taste sensations.

And of course, Japan was the first market to introduce iQOS with its pilot launch in Nagoya last November.

We plan to expand nationally in 2015.

Industry volume in Japan declined by 3.4% in 2014 consistent with projected 3% to 3.5% decline range.

For 2015, we forecasted the decline will moderate to a range of 2.5% to 3%.

In Indonesia, industry volume was up by 1.9% in 2014 to 314 billion units.

This growth was driven by a 7.5% increase in the machine-made kretek segment, which now accounts for approximately 74% of the total market, partially offset by a 13.1% decline in the handrolled kretek segment.

Our marketshare grew over the course of 2014 and reached 35.3% in the fourth quarter.

This sequential improvement was driven by strong performance in the machine-made kretek segment due mainly to Dji Sam Soe Magnum and the successful launch of Dji Sam Soe Magnum Blue in April of 2014.

We now hold approximately 30% share of this growing segment led by our flagship brand, Sampoerna A.

There has been a significant moderation in the volume decline of our handrolled products as competitive brands have followed Dji Sam Soe above the important IDR1000 per stick price point.

As handrolled products face a significantly lower excise tax increase in 2015 than machine made product, this bodes well for the segment where we are the market leader.

We forecast cigarette industry volume growth in 2015 of up to 2%; although the market will remain sensitive to fuel and commodity price.

While the Philippines continue to be a challenge and a drain on our 2014 income performance, we have recently witnessed significant positive price movements at the lower end of the market.

After we raised the recommended stick price of Jackpot from PHP1.25to PHP1.50in October, our main competitor increase the recommended stick prices of its brand by PHP0.25 in December and further increases have occurred since then.

This has reduced the stick price gap to Marlboro from PHP1.75 in January 2014 to between PHP1 and PHP1.25 currently.

We believe that the introduction of tax stamps will further improve the competitive environment in a market where cigarette consumption remained resilient last year at around 100 billion (inaudible).

These developments augur well for profitability to improve over the mid-term and we remain bullish on the prospects for this market.

I will finish my discussion of the Asia region with a brief update on Korea.

The 120% increase in total tobacco excise taxes effective January 1 will be disruptive given its impact on the average retail selling price.

To pass the tax on, we increased the retail price per pack for both Marlboro and Parliament by KRW1800 or approximately 67% to KRW4500.

For 2015, we forecast a decline in the underlying cigarette industry volume of approximately 20% to 25%.

From an income perspective, however, the tax increase should not have a material impact on our business performance this year due to a gain from inventories that we were able to build prior to the tax change.

Let me now turn to Russia where we performed exceptionally well in 2014.

Marketshare reached 27.1%, up by 1 full share point versus prior year.

Our share growth was driven by the strong performance of above premium Parliament, mid-price L&M and low-price Bond Street, which positions us well for further expansion in 2015.

Cigarette industry volume decreased by 9.2% in 2014, in line with our forecast of 9% to 10%.

The decline was due primarily to significant excise tax-driven retail price increases, which averaged around 22% for PMI.

These price increases helped us boost our unit margins and total profitability in the market despite a 3.5% lower volume.

For 2015, we forecast a decline in total cigarette industry volume of 8% to 10% due to excise tax-driven price increases and a deteriorating macroeconomic environment.

Moving on to our brand portfolio, Marlboro was a key driver of our continued global marketshare momentum in 2014 with growth of 0.3 points in both the EU and EEMA regions.

The brand's performance was particularly strong during the fourth quarter with share growth in all four regions providing positive momentum heading into 2015.

Marlboro share growth was driven by the successful initial rollout of architecture 2.0 in 26 markets starting in the EU region and the expansion of the Be Marlboro marketing campaign traditional market.

Beyond Marlboro, we're very pleased by the strong 2014 performances of our other key international brand, which demonstrate that our investments behind them are clearly paying off.

Of particular note was the continued robust growth of [above brilliant] Parliament with cigarette volume up by 5.6% versus 2013 and notable share gains in Russia and Turkey.

Chesterfield had an exceptional year with cigarette volume growth of 22.6%.

In addition to its success in the EU region, which I covered earlier, the brand grew cigarette volume in all other regions.

L&M was also a success in 2014 with cigarette volume essentially stable or growing in three of our four regions and notable share gains in Germany, Russia and Ukraine.

The unparalleled strength of our brand portfolio provides us with significant pricing power.

2014 was another robust year on this front with a total pricing variance of $1.9 billion.

This is in line with our historical annual average and was driven by the EEMA and Latin America and Canada regions.

For 2015, we foresee a pricing variance remaining broadly in line with that of our last year.

Please note that, as of today, we have implemented or announced approximately 70% of the pricing that is included in 2015 EPS guidance.

We continue to focus vigorously on our cost base and in 2014 exceeded our gross productivity and cost-saving target of $300 million with significant savings related to specification rationalization and procurement.

In 2015, we anticipate that our productivity and cost-saving program, combined with savings associated with the manufacturing footprint initiatives that we implemented in 2014, should result in a total Company cost base increase, excluding RRPs and currency, of approximately 1%.

Turning now to our RRP portfolio, 2014 opened a groundbreaking new chapter in the history of our Company with the commercialization of iQOS in Nagoya, Japan and Milan, Italy.

As a reminder, neither pilot launch is being made with any health claim.

The marketing focus is on innovation and product benefit such as no ash and less smoke.

Although it is still too early for a comprehensive quantitative assessment, I am very pleased to share with you that both adult smoker and trade response is very positive and that the performance of iQOS is in line with or exceeds key indicators that we established.

We should be in a better position to provide data around the middle of this year.

In Nagoya, total iQOS device sales are well ahead of projections and growing steadily every week.

Sales of HeatSticks are also growing sequentially, but quite naturally do not yet reflect high rates of full conversion.

However, as critical mass and product normalization build up over time, we would expect these rates to be in line with our 2013 [whole offer] test results.

Based on our latest estimates, iQOS awareness amongst adult smokers has reached approximately 34% and adult smoker profiles are on target.

Furthermore, the iQOS flagship store concept is a success.

Our logistics chain is working well and product defect and return rates are much lower than we had anticipated.

In Milan where the selling channel is limited by design to a subset of the tobacco distributors and consumer communication is severely restricted, iQOS device penetration had, as expected, lagged that of Nagoya.

However, HeatStick sales reflect a higher conversion rate consistent with the characteristics of the market.

Based on our latest estimates, iQOS awareness amongst adult smokers has reached approximately 16%.

Other indicators are in line with Nagoya.

In both markets, Marlboro HeatSticks are subject to a lower excise tax rate than cigarettes.

Given the positive initial performance of iQOS, we are confirming our plans to commence national expansion in Japan and Italy, as well as pilot or national launches in additional markets later this year.

These launches will be supported by a new release of iQOS that incorporates feedback from the pilot market and features a variety of colors and textures to broaden the product's appeal amongst adult smokers.

Our 2015 guidance includes incremental spending versus 2014 for the deployment of iQOS, which is skewed towards the second half of the year.

We continued to reward our shareholders generously in 2014 despite a significant currency headwind that adversely impacted our free cash flow by $1.6 billion.

Last September, our Board of Directors approved an increase of our dividend by a further 6.4% to $4 per share on an annualized basis.

This represents an increase of approximately 117% since the spinoff in 2008 and equates to a dividend yield of 5% based on last Friday's closing share price.

In 2014, we paid $6 billion in total dividends to our shareholders and spent a further $3.8 billion to repurchase 45.2 million shares.

We are currently operating in a debt level corridor that is close to the maximum that would still allow us to maintain our single A credit rating.

We remain committed to returning around 100% of our free cash flow to our shareholders and are taking appropriate measures to further reduce our working capital and keep capital expenditures flat despite the expansion of RRPs.

At prevailing exchange rates, the adverse currency impact on our 2015 net earnings would be approximately $1.7 billion, which consequently will impact free cash flow.

Furthermore, the currency environment remains extremely volatile.

In this context, we are focused on managing our cash flow prudently and maintaining financial flexibility for business development opportunities.

Consequently, we do not currently envisage any share repurchases in 2015 and this is reflected in our guidance.

However, we will revisit the potential for such repurchases as the year unfolds depending on the currency environment.

In conclusion, we enter 2015 with confidence in our business outlook.

We delivered a solid currency-neutral performance in 2014 with adjusted diluted EPS growth above our guidance and successfully executed on a number of our key strategic initiatives that will generate attractive returns in the years to come.

We also made substantial progress in addressing market-specific challenges.

Our business is supported by strong fundamentals and positive momentum.

Our leading brand portfolio is driving continued robust pricing and marketshare gains while our vigorous focus on our cost base, notably through the optimization of our manufacturing footprint, is enhancing operational efficiency.

These strong fundamentals are enhanced by investment behind Reduced-Risk Products.

We're excited by the prospects for iQOS and are pleased by its performance thus far.

For 2015, we are targeting currency neutral annual growth, excluding acquisitions, of 4% to 6% for net revenues and 6% to 8% for adjusted OCI.

We are further targeting growth in adjusted diluted EPS of 8% to 10%, excluding currency.

These targets are a clear reflection of the strong confidence that we have in both our business and the outlook for the year, particularly given our incremental spending behind the deployment of iQOS.

Thank you.

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

(Operator Instructions).

Matthew Grainger, Morgan Stanley.

Hi, good afternoon.

Thanks.

Just two questions.

One, I wanted to ask a bit more about Japan to better understand the inventory reduction there.

Is that a function of how retailers are temporarily managing levels across manufacturers?

And consequently, is that a timing issue that could reverse next year or was that just the lag result of some of the share losses you've seen over 2013 and earlier this year?

Okay, to put this inventory movement in context, we should all remember that we had to close Bergen op Zoom during last year and this is an 80 billion (inaudible) factory and consequently, we had to prepare for the closure and also move production to a number of other factories.

We had to build in the particular case of Japan some safety stocks, but not only in the case of Japan, during the year.

And some of these inventories had to carry through the year-end and will come back in 2015.

For the particular case of Japan, however, the objective for the year was to adjust inventory levels to both the market decline in 2014 and anticipated for 2015 and in addition to that to our lower marketshare.

And the vast majority clearly of these adjustments as we rightsized will not come back.

And as I said, because of maintaining some safety during the year, we had to do this adjustment in the last quarter.

So that's basically the whole story.

Okay.

If we are trying to put that in context, I think many investors will look at the flat adjusted operating profit performance this year and the expected acceleration back to 6% to 8% next year and view that as a fairly high hurdle.

If we're trying to look at some of the moving pieces that will shift from year to year, those inventory reductions in Japan over the course of the year that you purposely course-corrected on, how much of a drag was that on this year's full-year total Company-adjusted operating profit?

I think the inventories in the last quarter -- I can't quantify exactly, you appreciate -- but probably 1 point.

About 1 point in the last quarter.

It's Jacek here.

You see on an adjusted basis what was our volume development in the fourth quarter.

I mean we had it -- Andre had it in the remarks.

So yes, there was a drag clearly coming from this rescheduling of a supply chain and the subsequent inventory.

Okay, that's helpful.

The key positives for the year clearly is the improvement in the Philippines I think.

That was a big, I think, issue we had in 2014.

I think we've stabilized in any case the share in Japan.

That was an even bigger drag than the inventories.

I think the business in Europe is doing fine.

So I think we fixed the issues we had announced we need to fix in 2014 and with this being behind us, I think we can look with optimism into 2015 and that clearly explains the swing we have in terms of OCI growth.

Okay, thanks, Andre.

Just Jacek, perhaps with respect to the dividend, I know this is a hypothetical question and you may just prefer not to address it, but the payout ratio is obviously extremely high right now.

Are there any guidelines you can provide on how you or the Board would react if currency headwinds pushed the payout ratio even higher on a reported basis?

Would the goal under those circumstances be to sustain some level of ongoing dividend growth even if it was only modest if you had let's say a 100% payout ratio?

I can answer that question, but I think Andre would be even more enthusiastic about answering these questions.

Look, we all understand there is huge currency volatility in 2015 and we have to be a bit cautious.

And clearly, dividend is a Board prerogative, as you know very well.

But I understand where your question points to or points at and I see no scenario under which we reduce the dividend in 2015, even if we have to temporarily stay at a very high payout ratio.

Okay, thank you both.

James Bushnell, Exane.

Hi, good afternoon.

Thanks for taking my question.

Just to follow up a little bit on the last point, so you mentioned that the stock production in Japan took a point off OCI growth in Q4.

And thinking about Asia, because that's clearly where you had the most weakness in the quarter, I wondered if you could give us a feeling of the moving parts there?

So was Australia the biggest drag on your profits?

And I know there are some other things like the Philippines and you had some investment, so I just wondered if you'd help us think through what the big drags are there and then that would help in terms of modeling going forward?

Thanks.

I think you mentioned them.

Clearly, Australia was a big drag compared to 2013 and we had -- Japan overall as we said at the beginning of the year, because we expect a lower share in terms of the inventory adjustments, clearly, Japan would be another drag.

Now we've stabilized our share and quarter to quarter, clearly, Japan on an underlying business basis is rather stable, but we had to make the timing of this inventory adjustment, as I explained previously, because we had to maintain certain safety stocks until the whole situation of the Bergen op Zoom closure is resolved.

So I would say it's Australia and clearly, partially the Philippines, but don't forget that in the Philippines we increased prices ahead of our main competitor there.

Plus, during the year, we had to absorb partially excise tax.

Now the good news about the Philippines is that we had a price movement at the bottom of the market.

Prices per stick now of virtually any brand that comes (inaudible) to or above, our price gaps are reducing so the Philippines definitely are not going to be of any negativity and if any, they will turn positive this year.

I think that's an excellent development, but we have to watch the situation carefully.

But so far so good.

I feel much better now than I felt six months ago and three months ago, I can tell you.

Okay, thank you.

I wonder if you could comment also on how you see the outlook in Australia this year please.

It is early days.

First of all, in Australia, the market decline is 10.6%, but if we correct for inventory movements 2013 to 2014, the underlying is roughly [4.6.0%].

And as we know, this is entirely driven by the excise-driven price increases that are pretty substantial in Australia.

I think we know the issues in Australia is the growth of the low price, the discount segment and some competitive activities.

So we said that we have to put in place a strategy to stem the growth and I think our pricing strategy that is currently in place is bringing results.

We see a slight deceleration of the deep discount segment.

Part of this is technical, part of this is real, but I would not say yet that we can declare that the deep discount segment has stabilized.

But sequentially it looks like it doesn't grow any more at the pace it used to be.

We also see some positive price movement at the bottom end of the market.

That's good news.

This needs to be confirmed because if there is price movement, it's good, but we have to see how much of that is discounted back.

If that sticks, this is also a positive development.

Overall, our estimate is that it's unlikely that Australia would contribute positively to our OCI growth this year, but definitely we don't anticipate this to be the kind of (inaudible) drag that we had in 2014.

So it's early days; we'll see how the next three or four months unfold.

I don't know if that answered your question.

That was great.

Thank you very much.

Judy Hong, Goldman Sachs.

Hi, Andre, Jacek.

So maybe first on FX, I guess just maybe given really the heightened level of FX volatility, can you talk about if there are any plans to perhaps better align your revenue and cost structure in some of your key markets like Russia, Japan and even your exposure to the Swiss franc?

I think we look at our cost structures constantly and you know we're focused on improving productivity and efficiency and I think the indication we gave that total cost excluding RRPs are going to grow by no more than 1%.

It's a clear sign that we are very focused on these items.

Now every market is particular and Jacek will elaborate a bit more on this, but, as a matter of principle, in many markets, we have costs that are in local currency, but we also have costs that are in euros or in dollars like tobacco leaf and certain materials.

Clearly, rebalancing that cost structure is a bit more difficult.

But, today, I would say that in the vast majority of the market, even in Russia, we are not dollarized in terms of the cost basis we have and agreements we have with third parties other than the materials I explained.

So we see a reduction in the cost base, as well as currencies devalued.

You're absolutely right.

Judy, one thing which maybe will help looking at the (inaudible) an $0.80 EPS negative variance is the currency net in 2014.

The transaction impact, negative transaction impact is just in the range of a 10% of this total amount.

So most of the impact, which we are incurring, is coming from translations.

And to Andre's point, if I take the largest individual markets on net profitability per market, we take Indonesia and Russia and have a local cost is in the range 65% to 75%.

I'm talking total cost, so this is COGS in an all discretionary market and overhead, etc.

spend.

So we have obviously quite a significant portion of the natural hedges for the cost structures already built in, but, as I said earlier, again, the impact on us is mainly coming from a translation.

Okay, that's helpful.

And then just maybe looking at Russia and when the industry volume was down 9.2% in 2014, your volume actually did a lot better, down 3.5%.

I think you're commenting on 2015 with industry being down in that 8% to 10% range.

So my first question related to that is your confidence in keeping your volume decline much more modest versus the industry and obviously that implies continued marketshare in that market.

And then, secondly, given that the tax increase in 2015 in Russia is more modest, do you think that 8% to 10% volume decline is more representative, just the macro pressures that you're experiencing in that market?

And unrelated to that, just comment on how you're seeing the pricing in that market and the consumers' ability to absorb cigarette price increases in a pretty inflationary market.

Okay, we had a very, very good year in Russia in 2014 and I believe the portfolio fundamentals were, plus the initiative, should maintain share growth momentum.

Now whether this can fully compensate volume or not, this has to be seen.

The second important thing in Russia is a question of pricing.

We had about 22% pricing in 2014 and the November and December price increases were up roughly 13%, way above average, on our portfolio, which, of course, will carry forward almost entirely in 2015.

You appreciate I cannot comment about further price increases for the year, but the situation in Russia, we all watch it very closely.

Clearly, the combination of the sanctions and the oil price have an impact on the economy.

We start seeing inflation and what the unknown is for the year, and this is not only particular to Philip Morris, is what will happen with real incomes and salary.

So as you know, we take pricing decisions trying to balance always consumer affordability, price gaps, illicit trade and clearly margin improvement and we'll always pursue the opportunity within that equation.

This is -- Russia, because of the macroeconomic environment, Judy, we have to assume that we will have a similar decline in 2015 that we had in 2014 despite, as you rightly pointed out, a lower excise tax.

So how this will unfold, I don't know.

I will be the happiest man on earth if the decline is lower than what we foresee.

Got it.

Okay.

Thank you both.

Bonnie Herzog, Wells Fargo.

Hi, Andre.

I was hoping you could drill down a little further on the consumer behavior surrounding iQOS in your two test markets.

For instance, could you give us a better sense of dual usage, repeat purchase, for example and then cannibalization rates maybe on Marlboro combustible or possibly any of your other brands?

And then I'd also like to hear from you what was the biggest positive surprise and the biggest negative surprise from your two tests?

Okay.

A lot of questions here.

First of all, I think overall we are obviously positively surprised by the performance we had.

You appreciate I cannot disclose precise numbers for competitive reasons, but clearly our device, our iQOS device sales were well ahead of what we had initially projected.

And we're talking the thousands of units; we're not talking small quantities.

And they continue every week at the pace of 3% to 4%, so this is not bad at all.

Regarding conversion rates, it is a bit premature to measure this because as we are building a consumer base, it takes time to make the assessment and it takes time for people to fully convert.

The numbers we see in terms clearly of offtake or repeat purchase, and mind you some of the consumers bought cartons at the beginning, so it's difficult to judge daily purchases of packs, we see that the rate of full conversion is clearly lagging behind the amount of units we sold, but that's natural and we expected it.

We also need to understand the situation in Japan that people still have the ability to smoke combustible products in very many venues.

So that's natural that initially they use iQOS in situations like in their houses or in the office where they can't use combustible products and it's mostly and slowly, they will eventually convert more and more.

So I don't have yet a sufficient database to know exactly what the full conversion versus occasional are.

We'll have a better reading in a couple of months, but all I'm saying is that the progress is pretty good and steady and we should not be totally impatient and think that everybody will convert in day one.

Even the people I know around, they took some time to convert.

And the awareness of the product is right.

I think the consumer profile is on target and as I said also in my remarks, we are testing our supply chain.

Return rates are much lower than we thought; although people have the option to return the product if they are not happy.

And we are learning also a lot in terms of marketing so that we can adjust our programs when we go national.

So overall it's a pretty good experience.

As expected, and I said in my remarks, in Milano because of less marketing freedoms and more difficult hence higher difficulty to create awareness, we're a bit behind Nagoya in terms of absolute amount of iQOS units sold, still in the thousands, but we have an apparently higher full conversion rate also because there are much more restrictions in Italy.

One particularity of Italy is that there is an initial, I would say, reluctance for people who have tried the electronic cigarettes to try iQOS because they had a bad experience with electronic cigarettes, but the ones who finally try and buy, they are more committed because they see the difference.

But this is more qualitative and anecdotal at this stage than quantitative.

So again, good progress.

We've decided to go national and in two months, we'll have something that is really quantifiable, then, of course, we will communicate this to you.

Okay, that's really helpful.

Then I just have a question or I guess probably a two-part question on your margins.

First, your margins in the fourth quarter deteriorated quite a bit, so could you drill down on the key drivers of this?

And then in terms of 2015, you mentioned your costs ex-RRP will increase 1%.

So just trying to understand what you're hoping to achieve or accomplish with these higher costs and investments.

Clearly, you're making strategic investments in your business.

So how should we think about this in terms of the potential for accelerated growth in the future?

Okay, I'm referring here -- the 1% refers to the entire base.

We should not forget that we have the benefit also this year of the manufacturing footprint improvement of last year.

We also benefit from moderating leaf prices.

That will continue into the future and clove prices also, that has been a big cost item in 2012 and 2013, are also stabilizing as we had good crops.

So from a manufacturing perspective, clearly, we are on the low end of the costs.

For the rest of the business, we pursue also efficiency improvement programs, but we never stop the investments that will grow the business further.

And for this year, clearly, we have some exciting programs on all the brands.

We continue with the deployment of 2.0 Marlboro.

We started with Red, we continue with Marlboro Gold and the other variants of the brand.

So that continues investment and we also essentially revamped and created new marketing campaigns for all the other key brands in the portfolio that we're also deploying and investing behind them, but as I said in my remarks, clearly, that pays dividends.

So be reassured that we don't stop investing behind the growth of the business and I think our marketshare performance has demonstrated that that was the right thing to do.

For the rest, as we said and I said in previous interventions, our long-term objective is to always contain costs between 1% to 3% ex-RRPs and depending on leaf prices, I think we can even, at least for the next two years, remain at the lower end of this range.

So I think we're pretty happy about that.

And just to clarify also on RRPs, there is incremental investment this year compared to last year's incremental investment and the variance is slightly above the range we had last year or the (inaudible) we had last year.

So it's about 1 EPS point, just the increment.

All right, thank you.

That was helpful.

I appreciate it.

Chris Growe, Stifel.

Hi, good afternoon.

I just had two question for you, if I could, please.

The first one I'm just curious by, Andre, your view on -- you talked a lot throughout 2014 a definite macroeconomic effect on the business.

It would seem like that environment generally is still in place in 2015.

I guess related to that, I'm just curious if you could give a general outlook for volume and also just curious if you're seeing any mix degradation across the business, any tradedown broadly rather than market by market, if that's having an effect on the business in 2015?

Okay.

It's difficult obviously to appreciate to predict (inaudible) industry volume this year.

I would see it, and I will explain some of the caveats, in the 2% to 3% range versus what I mentioned previously that mid-term, I think we can return to 1% to 2%.

First of all, we have all this currency situation that is very difficult to predict what precise effect it's going to have on the economies around the planet.

The second thing, clearly, we had to revise our estimate for the Russian market given the particular situation there.

We thought that 2015 would be in the range of 4% to 6% roughly.

Now we think that it will be at 8% to 10%.

Of course, that's an assumption.

And the positive, however, can come from the Philippines because when I say 2% to 3% that assumes that no cigarettes return to the illegal market in the Philippines.

Now hopefully given the developments in the Philippines, we'll see some more volume coming back to the legal market and that can change clearly the overall equation.

So we may end up in the middle of that range I gave, but that's the best I can do at this stage.

That's fair.

Now, the overall economic outlook, we all know the fundamentals.

Oil prices will be lower, so that helps economics and consumer spending, but, in some places, we're going to see inflation following devaluation.

Not in many because, as you all know, it's only one currency appreciating and all the others depreciating and remaining in relative parity to each other.

So when they trade with each other, they don't have imported inflation.

So Russia is the one that comes to mind first as we discussed previously.

Overall, I don't see an acceleration overall of downtrading at all on a global basis.

I think we stay on the same trends as we were in 2014 if not slightly better.

We know the specifics; Australia, we discussed it and so on.

Obviously, there is a bit of geographic mix, but if we look at total market declines in 2014, there is no substantial difference between OECD and non-OECD, especially thanks to the recovery of the European Union.

I mean OECD declined roughly 3% something and non-OECD 2.5% in 2015.

So I would say overall nothing worrisome at this stage.

Okay, that's helpful.

If I could just ask one question just for me to understand just some perspective on the lack of share repurchase, obviously supporting the dividend.

I know that's very important you.

I wanted to understand like throughout 2015 when you're at the margin, you are close to a debt level that would push your rating down.

Is there any consideration where you would allow for the debt rating to go down?

I'm just thinking about acquisitions, for example.

So maybe not so much for share repurchase, but from an acquisition standpoint would you or the Board consider the debt rating -- violating the debt rating, if you will?

We always said, and I maintain this, we will not lose our rating for share repurchase purposes.

Now if we have a strategic reason, if there's a strategic acquisition or something, then, of course, that can be considered.

Absent that, we will do everything we can to maintain our A rating.

And I think we have to be prudent on how we manage the situation given the currency volatility we're in.

Having said that, I want to stress that we are committed to share repurchases.

We'll see how the situation unfolds and as soon as we can resume them, we will.

We have not changed our approach to that.

It's just a temporary situation that calls for caution given what happens with the currency.

Sure.

Well, that's good perspective.

Thank you for your time.

Michael Lavery, CLSA.

Good afternoon.

So just to I guess connect two things that we've touched on already.

If it came down to it and you had to decide between the dividend and the debt rating, how did those fall relative to each other in terms of priority?

I think I tried to clarify this.

First of all, it's rather a speculative situation and I said that I don't see scenarios under which we will reduce our dividend unless we have Third World War.

Okay, that's helpful.

So the dividend would come before -- if you had to choose between the two, the debt rating might suffer before the dividend certainly would?

That's fair?

But even if you do the mathematics, that's a consequential effect.

Thank you.

Then just looking at the EU, your guidance for the operating income growth there, does that include the savings from the Netherlands plant and how much -- can you quantify how much that is?

Well, that's all baked -- yes, it includes obviously the savings from the footprint optimization.

That's included in the overall guidance and in the cost indications I gave.

So how much does that add from just the plant closure?

For a variety of reasons, I cannot disclose that number.

I'm sorry.

Okay, no problem.

And then just looking at Indonesia, certainly the inflation from the fuel subsidy cut late in the quarter had an impact on the category volumes there.

But with oil prices pulling back, that's reversed now.

Can you give any sense of what, even though it's early in this year, have you seen improvement in January or what does it look like so far as a start to the year?

It's very early to judge the effect, but what you said is correct.

The subsidies were removed, but oil prices are a bit low.

We didn't see anything in the month of January that shows any change in the dynamics in this direction but it's only one month.

So there's not improvement yet, but it's just too early to really say?

Yes, we didn't see any effect in January.

That's all I can tell you.

Okay, thank you very much.

Vivien Azer, Cowen and Company.

Hi, good afternoon.

In terms of your outlook for pricing for 2015, please, with it being broadly in line with historical levels, can you talk a little bit about the composition of that pricing contribution because historically it's been fairly well-balanced across your geographies, but clearly in 2014 it was decidedly weighted towards EEMA and Latin America?

Thank you.

Yes, in 2015, it's very balanced.

Okay.

And then the second --.

Sorry, it's factual.

That's what we project and now we know the specificities of 2014.

We had Italy that skewed clearly the European Union and we also had the Philippines absorption that skewed Asia and these are the two fundamentals.

Thank you, that's very clear.

As a follow-up, on the EPS growth outlook of 8% to 10%, impressive that you guys are maintaining that absent the buyback.

But as I think about the contribution then from nonoperating items of 200 basis points, clearly you get the residual benefit of the $3.8 billion in share repurchases that you did this year.

But can you comment, Jacek, at all about your outlook either for tax or for interest expense?

On the tax, we should stay broadly in that effective tax rate, which we had in 2014.

So you're talking 29%, slightly below 29%.

And on the interest expense, you remember I hope that quite a portion of our debt portfolio is in euros.

And so, obviously, to put a bit of the lower pressure reduces the pressure coming from the interest to serve our bond portfolio.

So there is some benefit on us coming due to the overall lower interest rate, lower interest rate environment and also the composition of our debt portfolio due to the significant portion of our euro debt.

That's very helpful.

Thank you very much.

Erik Bloomquist, Berenberg.

Good afternoon.

One of the markets we haven't really talked about today was Turkey and there we've seen volumes improve a bit.

I was wondering if you could comment on the outlook for the Turkish market.

Is the downtrading finished, does it look like it's stable and does that then suggest that there is an opportunity for perhaps some profit growth and with the volume base remaining stable or have there been some regulatory moves there that suggest we may have another difficult year following a decent year in Turkey?

Thank you.

Well, volumes in Turkey are stable.

Illicit trade is stable, increased a little bit, which outlines the underlying volume is even better.

I don't see any change at this stage.

I mean excise taxes are in, there was moderate increase in the specific and of the minimum tax.

So from a total market perspective, I don't see any particular change in the trend.

Now regarding the dynamics, clearly, there has been some downtrading, but shares have to -- seem to have stabilized now and we did very well in the premium segment, particularly with Parliament despite all the downtrading.

So I think we are there for a decent year in Turkey going forward.

Thank you.

Owen Bennett, Nomura.

Good afternoon, guys.

Just a couple of questions.

Firstly, I was just hoping you could give an update on the rollout of Marlboro 2.0 in terms of how is it performing with regards to retaining current Marlboro smokers and also I guess crucially is it attracting competitive smokers?

And also how many more markets are expected in 2015?

Secondly, just coming back to Russia pricing, and we understand that you may have gotten a pricing benefit in 2014 from your stake in Megapolis, could you confirm whether this is correct and if so, is there likely to be some giveback from this benefit in 2015?

Thanks very much.

On Marlboro, I think we are very pleased with our rollout.

We have 100% retention of existing smokers, which is I think remarkable.

And we do see change both in profiles and overall attraction from competitive smokers and the share performance of the brand in the markets where we have rolled out is a clear testimony to the success of 2.0 and we will continue rolling it out.

The plan is to be fully done with all the rollouts by early 2016.

We are already in 26 markets and growing by the day.

So we pursue the plan and we are very happy with it.

Now Megapolis not in the pricing.

It's an item that is below the OCI line.

I'm asking the people that are more -- okay.

Hello?

It's income from unconsolidated subsidiary; that's what it is.

Then we received clearly a dividend, so, yes, it will be somehow affected by the ruble, etc.

temporarily, but that's currency, clearly.

So it would only (multiple speakers) there.

Okay, cool.

Thanks.

That was our final question.

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

That concludes our call for today.

Thank you all for joining us.

If you have any follow-up questions, you can contact the Investor Relations team; we're currently here in New York.

And our next presentation will be at the Consumer Analyst Group of New York or CAGNY conference on Wednesday, February 18.

Thank you again and have a nice day.

Thank you.

This concludes today's conference call.

You may now disconnect and have a wonderful day.