菲利普莫里斯國際 (PM) 0 Q0 法說會逐字稿

Good day and welcome to the Philip Morris International second quarter 2013 Earnings Conference Call.

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

(Operator Instructions).

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

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

Please go ahead, Sir.

Welcome and thank you for joining us.

Earlier today we issued a press release containing detailed information on our 2013 second quarter results.

You may access the release on our website at www.PMI.com.

During our call we will be talking about results for the second quarter of 2013 and comparing them to the same period in 2012 unless otherwise stated.

References to volumes are to PMI shipments.

Industry volume and market shares are the latest data available from a number of internal and external sources.

Organic volume refers to volume excluding acquisitions.

Net revenues exclude excise taxes.

Operating companies income or OCI is defined as operating income before general corporate expenses and the amortization of intangibles.

You will find data tables showing adjustments to net revenues and OCI for currency, acquisitions, asset impairment, exit and other costs, free cash flow calculations and adjustments to earnings per share, or EPS, as well as reconciliations to US GAAP measures at the back of this presentation, which is also posted on our website.

Today's remarks contain forward-looking statements and projections of future results.

I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release 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 Jacek Olczak, our Chief Financial Officer.

Thanks, Nick, and welcome, ladies and gentlemen.

As previously foreseen we had a challenging second quarter.

Our adjusted diluted EPS was up slightly excluding currency.

Cigarette volume declined by 3.9%, due principally to lower industry volume in the EU region, Russia, Turkey and the Philippines, as well as inventory movement in Japan and Russia.

Pricing remains strong and we had solid share gains particularly in the EU region.

However, these were not sufficient to offset the impact of unfavorable volume mix, additional investment, notably in Indonesia, the Philippines and Russia and higher clove and tobacco cost in Indonesia.

Our business fundamentals remain solid and we are confident in our ability to achieve the ex-currency guidance that we established in February and reaffirmed in May.

However, the evolution of tax-paid cigarette industry volume will remain a key variable and our main challenge for the remainder of the year, notably, due to the growth of illicit trade.

We anticipate better results during the second half of the year, and in particular, a strong fourth quarter.

This is based on the expectations that our volume declines will moderate as other smokers adjust to the higher prices implemented earlier this year.

Our strong market share performance in the EU region will continue.

Margins will improve thanks to recent price increases and we will have favorability with respect to the timing of investment in infrastructure and marketing.

Since April, we have witnessed a sharp decline in the value of certain currencies relating to commodities and emerging markets, such as the Australian dollar, Indonesian rupiah, Mexican peso, Russian ruble, and Turkish lira.

Accordingly, at prevailing exchange rates, our guidance now includes a full year of unfavorable currency impact of approximately $0.31 per share versus $0.19 in our previous guidance.

Our revised reported diluted EPS guidance for 2013 is therefore $5.43 to $5.53 compared to $5.17 in 2012.

The change solely reflecting the currency impact.

Excluding currency, this continues to represent a growth rate of approximately 10% to 12% compared to our adjusted diluted EPS of $5.22 in 2012.

This is in line with our mid to long-term currency neutral annual adjusted diluted EPS growth target.

Let me now discuss our second quarter results in more detail.

Our cigarette volume was down by 2.6% excluding the Philippines.

This reflects three main factors.

First, cigarette industry volume in the EU region continued to decline.

Second, industry volume in Russia was impacted by the large tax-driven price increases that were implemented at the beginning of this year, as well as the weakening economy.

Third, our second quarter volume reflected a difficult comparison due to the inventory replenishment in Japan in Q2 of 2012, as well as a lower market share.

There were, however, some favorable developments.

First, the decline in our volume in the EU region of 5.9% was significantly less then the 10.1% decline that occurred in the first quarter.

Second, we again achieved volume growth in the Asia region, excluding the Philippines.

And finally, the volume growth continued to be strong in the Middle East and North Africa.

Pricing continued to be the key driver of our income performance.

It helped to offset the impact of unfavorable volume mix on net revenues, excluding currency.

However, adjusted OCI declined by 3.4% excluding currency.

This was due to unfavorable volume mix, higher production costs, notably in Indonesia where higher clove and tobacco costs that to date have only been partially passed on, investment in business infrastructure and marketing in Russia since the second half of last year, and additional spending in the Philippines in the second quarter of this year to seek to achieve more sustainable price gaps.

Our ability to take pricing remains solid, including in the EU region.

During the second quarter we achieved a favorable pricing variance of $499 million, bringing our June year-to-date total variance to over 1 billion.

In May, we increased the retail prices in Germany by EUR0.20 per pack across our portfolio.

In June, we announced a federal price increase in Russia of RUB4 per pack across most of our key brands.

We have also increased prices recently in Belgium, Canada, Egypt, France, Greece, Indonesia, Spain, Switzerland, and Ukraine.

These price increases will help us achieve another strong pricing variance during the second half of the year.

Let me will now review a number of our key geographies, starting with the EU region.

We have seen some signals that politicians recognize that federal spending cuts to try to rein in budget deficits are not going to help Europe turn the corner.

However, few concrete measures have been taken so far to stem the continued rise in unemployment, which reached a seasonally adjusted rate of 12.2% in the EU in May this year.

This is compared to 11.3% a year ago.

In the second quarter, original cigarette industry volume was down by 8% and original fine cut industry volume declined by 0.8%.

During the quarter where weakness continued as consumers down trading to lower priced products, including illicit cigarettes.

Due to the continued deterioration in their economic situation and the resulting growth in illicit product, we are now forecasting a decline of cigarette industry volume in the EU region of 7% to 8% for the full-year 2013, compared to our previous forecast of around 6.5%.

While industry volume declined slightly faster than previously foreseen, we were able to achieve a better than expected market share.

Consequently, our cigarette volume declined by 5.9% and our fine cut volume grew by 4.3% during the second quarter.

On a regional basis, our cigarette market share increased by 0.7 points in the second quarter to 39.3%.

The gain was driven in particular by Marlboro, which grew by 0.5 points to 19.4%, with L&M, Chesterfield, and the Philip Morris brand also performing well.

In the fine cut category, we gained 1.2 share points to reach original share of 14.9%, as we continued to successfully extend our cigarette portfolio into this category.

Let me focus on the three of the key markets in EU region.

Namely Germany, Italy, and Spain.

Cigarette industry volume in Germany decline by 7% in the second quarter and fine cut industry volume decreased by 0.7%, following price increases in March.

However, it should be highlighted that the underlying decline in cigarette industry volume was 2.8% after the elimination of estimated trade inventory fluctuation.

Our cigarette share grew by 1.2 points in the quarter to 37.6%, driven mainly by the strong performance of Marlboro, which achieved its fifth consecutive quarter year on year share increase.

The economic downturn in Italy continues with unemployment increasing from 11.9% in February to 12.2% in May.

Italian cigarette industry volume declined by 7.2% in the second quarter and the fine cut industry volume was down by 10.5%, impacted by the reduction in the price gaps between fine cut product and cigarette that followed the large fine cut package increases made last year.

The underlying fundamentals of our business in Italy remains slow.

Our cigarette market share growth by a further 0.4 points in the quarter to 53.3%, thanks to the continued momentum of Marlboro and the success of the Philip Morris selection in the international low price segment.

We also gained share in the fine cut category with an increase of 7.9 points in the second quarter to 37.9%, following the successful introduction of Marlboro fine cut.

We were encouraged by the decision of the Italian government to postpone till October the 1 point increase in VAT that was due to be implemented in July.

We believe that such a measure would reduce consumer spending and hope that it will be further postponed or cancelled.

At the end of last month, the Spanish government modified their excise tax on tobacco products in order to enhance the predictability and stability of excise tax revenue, which had been undermined by adult cigarette smokers down trading to lower tax alternatives.

A specific excise tax on cigarettes was increased while the ad valorem rate was reduced.

At the same time the royalties excise tax burden on fine cut was increased.

The resulting reduction in the price gap between cigarettes and fine cut should help address the recent market imbalance, whether by cigarette industry volume decline by 12% in the first half of the year, while fine cut industry volume increased by 26.4%.

Our cigarette market share was up by 2.3 points in the quarter compared to 1.9%, as Marlboro, Chesterfield and L&M all grew.

Let me now turn to the EEMA market starting with Russia.

In Russia we estimate that cigarette industry volume declined by about 6.4% during the second quarter, as adult smokers reacted to fast driven price increases of RUB6 to RUB7, equivalent to 9% for above premium to 22% for super low price brands and to a weaker economy.

Our volume declined by 11.4% during the same period, as our distributor reversed its first quarter inventory buildup.

For the end of May our quarterly market share remains resilient and will adjust 0.2 points lower at 25.9%, despite delayed price increases by several competitors following the January tax increase.

Parliament, L&M and Bond Street continue to gain share, but this was more than offset by the decline of Chesterfield.

We expect higher profitability for the full year 2013 than last year due to our pricing strategy.

So, we are forecasting that cigarette industry volume will decline 6% to 7% on a full year basis.

In Turkey there was a resurgence of illicit trade during the second quarter when it reached over 20% of total consumption due to the government's focus on other priorities.

As a result cigarette industry volume declined by an estimated 11%.

It is difficult to forecast the full year performance due to the uncertainty surrounding future trends in illicit trade.

However, unless the government acts quickly to address this issue, cigarette industry volume could be down by as much as 7% to 9%.

The premium and mid-price segments continue to perform well.

Our mix improved delivered by the strong momentum of Parliament and Muratti.

However, the low price segment, which includes Lark and L&M priced at TRY6.5 per pack, was impacted by the expansion of the super-low TRY6 per pack segment.

This led to a slight erosion of our overall market share in the second quarter for May of 0.5 points to 44.8%.

We have addressed this issue for the reallowance of Chesterfield at TRY6 per pack.

In Asia we are continuing to strengthen our business despite the disruptive tax increase in the Philippines.

Our cigarette volume grew by 1.5%, excluding the Philippines, with Indonesia the key contributor.

In Japan, cigarette industry volume decreased by 2% during the second quarter and we continue to forecast a similar decline for the full year.

However, due mainly to the inventory replenishment that occurred in the Q2 of 2012, our volume was 10.2% lower than this year.

During the second quarter, where weakness continued in tense competitive activities and the successful launch by Japan Tobacco of its first Mevius capsule variants.

Our market share declined by 0.9 points to 26.9%, driven by lower shares for Lark, the Philip Morris brand, and primarily, the menthol variants of Marlboro.

We expect our market share to remain under pressure in the second half of the year, but we believe that we will make progress over time thanks to the continued resilience of Marlboro and a strong pipeline of innovative new product.

Indonesian industry volume grew by 3.5% in the second quarter, while we outperformed the industry with a volume expansion of 6%.

For the full year we now expect an industry growth rate of approximately 4%, which, while below the exceptional growth rate of the last two years, is consistent with the historical average for the market.

Our market share grew by 0.9 points to 36.1%, driven by Sampoerna A, U Mild and Marlboro, partly offset by the decline of Dji Sam Soe, which moved above the favorable IDR1000 per cigarette, or stick, price point.

Premium Sampoerna A is the clear leader in the growing, but increasingly price competitive, LTN machine-made kretek segment.

U Mild is the leading mid-priced brand in the segment, while Marlboro continues to strengthen its position in the white cigarette segment, where it reached a segment share of 76% during the second quarter.

The final market that I will cover is the Philippines.

The decline in the tax paid industry volume moderated significantly during the second quarter, with volume down by 7%, despite the continued high prevalence of local non tax paid cigarettes that are not included in this data.

We increased our investments behind Fortune and lower priced brands to seek to achieve more sustainable price gaps.

However, despite the very large tax increase, a local competitor's Mighty and Marvel brands have remained at last year's attractive price point of PHP1 per stick.

This gives the competitor a clear price advantage in a market where stick sales account for about 70% of the volume.

With only limited improvements in tax enforcement, the widespread availability of non-tax paid domestic cigarettes remains a critical issue.

It is driving a greater level of down-trading then originally foreseen and is impacting our volume, our mix and our market share which declined to 82.9% in the quarter.

We are continuing to work with the Bureau of Internal Revenue to achieve a level playing field.

Our volume increased from 13.5 billion units in the first quarter to 19.1 billion units in the second quarter.

For the full year 2013, we forecast that our volume will be down around 20% to 25%, but that the decline in consumption should be significantly less.

In conclusion, we remain confident that we will deliver solid financial results in 2013.

Industry volume remains a key challenge.

However, we expect to continue to achieve solid market share as well as higher prices.

There is no change to our guidance attributable to business regions.

Our revised 2013 reported diluted EPS guidance reflecting prevailing exchange rates is $5.43 to $5.53.

Our guidance continues to represent a full year growth rate of approximately 10% to 12%, excluding currency, compared to our 2012 adjusted diluted EPS of $5.22.

We anticipate strong free cash flow growth, excluding currency, in 2013 and remain steadfast in our commitment to reward our shareholders for attractive dividends and substantial share repurchase programs.

Our dividend yield last Friday was 3.8% and our target dividend payout ratio remains 65%.

During the second quarter, we spent $1.5 billion in share repurchases and have now repurchased close to 25% of the shares outstanding at the time of the spin.

Thank you.

And I will be now happy to answer your questions.

(Operator Instructions)

Bonnie Herzog, Wells Fargo.

My first question is in terms of the quarter, where did it fall relative to your expectations?

I'm curious, since your volume and overall business has to improve quite substantially to hit even the low end of your 10% to 12% currency neutral EPS growth?

What gives you the confidence that you can hit these targets and then what are the key drivers of this?

To start with, by its quarter, second quarter, nothing, frankly speaking, came in the second quarter was a surprise to us.

We knew that we were having inventory adjustment in Japan.

And maybe at this stage I can give you a little bit more details over the marketing of that adjustment.

If our shipment were down in Japan by about 10%.

If you take the market decline down it is about 8%.

So, on a shipment you are talking, well, around $1 billion of the adjustment or around $1 billion of adjustment.

You know that Japan is a pretty profitable market to us.

So, the volumes are an up [and expensive].

And in Asia we also knew that we going to scale up the investment behind the -- defending the price points in Philippines.

So, just those two countries is to market with a drag on the results, but as expected.

We knew it.

As a surprise, I think came a bit a week short in June in Japan.

And I think that sudden resurgence of the illicit trade in Turkey.

These were the things where at the beginning of the quarter we did not have it in our mind.

When it comes to second half of the year, as you have seen, we had a very strong pricing in the first half of the year, $1 billion.

I mean it clearly gives us and the pricing environment supported by the tax environment (inaudible) pretty comfortable about the delivering a strong pricing in the second half of the year.

Second thing is, there was just the timing of the annualization of our investment from a last year to this year.

If you look at our total cost volume, which you will have on a cost of goods sold and the total overhead, total cost of the Company essentially the negative variance which we have for the first six half of the year that fits for the year.

In the second half of the year, we showed to be essentially cruising flat versus 2012.

As I said, we have a strong pricing, the tax environment is reasonable, the cost comps is going to be to definitely easier for the second half of the year and, needless to say, the business performance measured by the performance of our brand in essential most of the geographies.

We are doing pretty well.

So, this give us a confident that we can deliver the results for the full year.

Okay.

That was really helpful.

I appreciate that.

And as you mentioned, pricing has been strong and you expect that to continue in the second half.

I'm trying to understand how your volume could be impacted for the second half and the full year.

You suggested last quarter that your volume growth ex-Philippines, would be positive this year.

I would like to know if you think that is still possible, given again how weak the volume has been last quarter and this quarter and then certainly especially given the Marlboro volume.

Sequentially, we see the improvement in the volumes in most of the geographies.

When we were revising the guidance outlook for the full year, is much more to recognize that some of this improvement are not as good as maybe initially we expected.

But, there are improvements.

So, clearly the volumes over quarter three and quarter four, it is going to work a little bit better.

But clearly the total market volumes, if Farazi is a key challenge for the year.

I think maybe what will help you, if you look at how we see ourself.

How we are going to do in the quarters Q3 and a Q4 and you know that this is our practice not to give any specific guidance for the quarters.

I would expect that the EPS level for quarter three to be somehow comparable to what we had in a quarter one.

And then we will have that all alignment of the revenue and the cost comps fully materializing at the back-end of the year.

Okay, thank you.

I appreciate it.

Thank you.

David Adelman, Morgan Stanley.

Hi, Jacek.

Hi, good morning.

Just to be clear on that last point, you think you are going to have an absolute level of earnings per share in the third quarter that is comparable to what you earned in the first quarter of this year?

I said that our practices and this is what I said to Bonnie, right?

Our practice is not to be very specific on the guidance on a quarterly basis.

I was just trying to give the outside community a little bit of color on what will be the pricing of the growth.

On ex-currency basis, my EPS in a Q3 growth rate should be comparable, maybe slightly above what I had in a Q1.

So, clearly, you see (multiple speakers).

Okay, a comparable growth rate, not a comparable level of earnings?

Just to be clear?

Yes.

Jacek, can you help us understand the magnitude of the change in the enforcement of the non-duty paid volumes in the Philippines?

In other words, if it started and the level of enforcement was at a zero, and 100 is sort of standard and optimal, where are we as we are going through month by month?

Well, the 100 -- the last year -- I have to start with the last year.

I think the last year done, the declaration from that particular competitor we estimate was in the range of 80% of the entire volume.

We brought it down of the government, [Tomco] brought it down to say about 20%, 25% under declaration.

But just the magnitude of the tax burden, which is say, at the new rate, is that you still can sell the product profitably if you declare 75% of the volume and under declare 25%.

So, the issue is now and that, of course, presumably, that particular competitor are still sitting on a MXN1 price point, which if you paid the full tax economically it is completely not doable.

The question is now, will the government continue?

Well there be enough willingness on the government side to make sure that their 100% of the volumes are being declared, as is my case and some other competitors in the market.

So that the market, to say yes, there is an improvement.

We are about to reach the tipping point in the Philippines, but we have not reached the tipping point.

And then it sort of relaxation, if you like, on a tax collection types of administration from the government.

And we might be going back to square one.

As it does improve, the hope and expectation would be you would, in effect, by down Fortune at a lower rate, correct?

And improve the profitability in the market?

Yes.

And this is what I referring to with our increased spending in next Q2.

It is going to continue in next Q4 behind Fortune.

It is the buying down the price at retail, so there is a sales allowances and other forms of us supporting the band to bring it to closer to this idea of price of say 150, 160.

And at the same time we have introduced a range.

We used to brands at one MXP1.

It should clearly put the pressure on our financials, you can imagine.

Our strategy was the two-prong strategy.

Bring down the price, don't lose the volumes and in the meantime work with the government so they bring up the bottom of the market, but making sure that everyone pays taxes.

We are delivering pretty well in other parts, but I have to admit that it is financially expensive strategy, but we also have to make sure that the government delivers on the second part of the strategy.

These two things have to work in sync.

Otherwise, we would (inaudible).

Olay.

And then last question, Jacek, on cash flow.

You reiterated again you expect a strong increase in free cash flow for the year.

It was down in the first quarter versus the year ago first quarter.

You mentioned on the last conference call that had to do with the phasing of the repatriation of profits to the United States and the related taxes you paid.

But it is down, again, even on a currency neutral basis in the second quarter?

What, why?

It is nothing structural, it is just the timing of our income, foreign income tax payments in our (inaudible).

We just had it in the second quarter.

I think as of quarter three, quarter four you will see that this things will level out.

So, what we initially said is still valid, that we expect the free cash flow to grow faster than earnings for this year.

One last thing.

Do you feel the growth of illicit trade that you have mentioned in a number of markets, do you think -- is that getting to a point where it is perhaps inhibiting or will inhibit your future capacity to take pricing?

Not really.

As you could see, we had a very strong pricing first quarter of the year.

We expect a strong pricing second half of the year.

It is not --.

I think what is more behind the illicit trade is not just the pricing which we taking, but the whole macro situation.

The pricing without the erosion of the customer purchasing (inaudible) and the pricing where you have erosion of the consumer purchasing power is an (inaudible).

And I think EU is exactly that sort of a situation.

That the pricing is pretty moderate, as is the tax environment.

That is good on that side.

But, if you have a continuous growth of unemployment, various austerity measures, et cetera, that puts the damper on the consumer spending.

Russia is, frankly speaking, also like this.

You have a reduction of the increases of managed utilities in Russia well above inflation, well above the rate of the increases last year, because utilities in Russia went down by about 10% in the first half of the year.

Last year was only 5%.

Pricing, yes, it is pretty high pricing, but we had to pass on the prices.

They not just being improve our margin.

So, therefore, we see a little bit of a softness on the market.

But this is not a pricing, it is much more the macro -- the down employment and other government, all the measures to improve the state deficit.

Okay, thank you.

Thank you.

Judy Hong, Goldman Sachs

Thanks.

Hi, Jacek.

Hi, Judy.

Good morning.

Just a couple of questions from my end.

First just I am looking at your Asia margins and clearly you had a pretty significant decline in Q2.

And then I know that there are sort of big buckets of the drivers of the margin decline.

You had the negative geographic mix with Japan being down 10%.

You have the Indonesia margin pressure from higher cost and then you have got the Philippines step-up in the investments.

I wanted to see if you can actually quantify thinking about these big buckets.

Can you quantify the drivers of the margin decline in Asia?

Well, I think you pointed them all.

Asia Japan which is more the one off in the quarter.

I said that the marketing needed adjustment in inventories.

You are talking in the range of 1 billion.

1 billion times the margin which will hurt Japan.

That clearly puts the dent on the performance of the region and the spending in the Philippines.

This is working on putting a pressure on the cost.

Now, Indonesia is still, about this time Indonesia is in the situations when we fully passed on the COGS.

That's also we have a lap on the clove prices and the leaf prices, so the pressure is being released from Indonesia.

Japan, as was I said, was the one-off.

Okay, Philippines going to continue.

All in all, a shortage of the -- I think Asia is going to have -- we will expect Asia to have a nice growth of the margins.

Strong growth of the margin, actually, in the second half of the year as are all the regions of PMI.

We expect for the full year that the operating margin for entire PMI that will be up versus last year.

We expect the margin growth on the top of PMI and as I said, the second half of the year you should see the improvement in all regions.

When you think about Japan and then outside of Japan and Asia, is Japan margin down also because you are spending more, given the competitive pressure?

And outside of Japan, is the Philippines really the only region where you are seeing, just at the country level, the margins being down year-over-year.

No, I think it is more to the shipment distortions which I had in Japan.

As you know, we continue spending in Japan.

We launching our products, so, there is support there.

But this is more due to the one off inventories and Philippines, which is the support of the Fortune and dollar lower-priced breaks for the [Conda] price point.

So, those are two items which essentially drag the margins into second quarter of Asia region.

Okay.

And just on Japan, it sounds like they're not expecting much of a market share improvement in the back half of the year, even though you have stepped up a bit of a spending in that market.

Can you just talk about what you are seeing competitively?

It sounds like really the intense competitive situation continued in the second quarter.

Do you think that just from a new product perspective you don't have enough to really deal with some of the competitive pressure?

I'm just curious why you think that the market share doesn't necessarily get better in the back half?

Well, I mean, that JT continues with the promotion of spending and the new product offering.

I think especially the weak leading of our share for June.

It's mostly attributable to the successful, I have to admit, at least initially, free product variance, capsule product variance from (inaudible).

As you know Marlboro, Phillip Morris and Marlboro was leading all - well, it was the leading of that part of the menthol segment in Japan.

We've been very successful.

We got a lot of share in the past.

(inaudible) Mild Seven at the time was one of the big brands which was not participating.

The cold competition is a little bit of contained to about a quarter of the market, which is the menthol.

And we have our nice share there.

We are actually over represented in that segment.

I think it is going to continue.

We will be under pressure with share.

But we also still have a couple of initial things in our sleeve for the second half of the year, plus we have very good performance from the brands which we launched in the first half of the year.

There will be a pressure on the share, but you lose share, you can gain share.

Let's remain optimistic.

Okay.

And lastly just in Russia, I think you called out some of the competitors were lagging in terms of the pricing in that market.

JTI took pricing recently.

Is your view from a pricing perspective, at least the competitive situation, is become a little bit more rational and that it is really just more about the volume situation.

Are consumers starting to react to the pricing increase in a more modest way now that you have had the six months of pricing in play with the tax increase in place?

Well, consumers, if you look at a smoking [incident] and daily and maybe (inaudible) three days, but we don't see much of the movement, if at all.

But as I said, maybe it is too early to read the impact of this price increase.

Remember that Russia was taking the prices year on year.

And every year, twice a year the prices just went up, was to go up in Russia.

This year is different because the size of the tax increase was larger, and so, obviously, the price increases are much more -- is larger as well.

I think if I look at my portfolio that I came was adjusted 0.2 losses.

Knowing that my brand lost price [gobs of a 6 to 7 robust] because this was the price increase from the beginning of the year versus competitors.

I feel very strong about the portfolio, and actually I start seeing a group payoff of the investment which we had in Russia this year and continuing this year, because it is demonstrated the strength of the portfolio of the [dicode], at least temporary, what the [defendant] showed despite his advantages pricing.

Now, you have the lagging in some other markets as well.

I don't think it is something which is a system leak.

It happens that somebody gets the focus on something else.

Perhaps would have been a very, very clear throughout Russia it is getting into maturity.

The volume is rather exciting, but we are much more excited about the growing the top-line and growing the bottom line.

I think, for us, the focus on Russia generate the value of the market rather than contemplate too much a bit of the volume of market share loss.

Okay.

Thank you.

Jon Leinster with UBS.

Going back to Bonnie's question (inaudible), the good guidance.

Gave no change to EPS guidance except currency.

But volumes do appear to be quite substantially worse then probably initially thought.

Can I push you, is there any sort of number you can give for full year ex the Philippines and presumably the swing factor in the second half you mentioned pricing and costs?

Does that mean the second quarter increase in cost in the Philippines and Indonesia are dropping out again?

As the price moves on, unfortunate, in the Philippines a temporary item, or is that going to be a permanent reduction?

I said on the total cost, and I'm showing one of the questions before, the total cost for the Company, the variance which we have ex-currency on the first half of the year, that is essentially for the full year.

And then I will have the much better clear cost comparisons in the second half of the year.

Pricing $1 billion, I would say, will qualify this as a strong pricing.

We don't see any much, any sort of a headwind at this stage to our pricing.

I think we are going to continue with a strong pricing going forward.

You will have heard we have announced prices recently also in Germany and France, a number other locations.

So, this, obviously, is going help the year.

And volume.

Volume and total market volume is not our performance, is our market share is pretty strong and we grow income dollar market share in a number of places.

I think the single biggest challenge which we will have this year is the total market size.

And this I have to admit, the number of the factors which plays to this one, which makes a little forecasting more difficult.

It may be in other years, but this is the year when we have a significant challenges on the total market.

But it is settled.

They dappled at the-- the response of the Company has been to ramp pricing probably more than they expected in the second half to offset that volume, the market volume declines

Yes, we always where focused on a growing to revenue and a bottom line.

So, I think we don't have any major switch in our or change in our strategy.

Totally, totally separate subject.

The famous E cigarettes, is the strategy of the group remains, as it was, in July, 2011 with the sort of very much focused on heat not burn products rather than E cigarettes.

So is that something which is flexible depending on the way the market develops?

No.

It is flexible because we said we working on a three platform.

At two platforms which are based on the heat versus burn and a third platform which is essentially, one could say, versus (inaudible) is cigarette.

We are making progress on all three.

We are also watching what are the developments in the markets I think our three platforms assessing what we see today in the market we should be able to address all opportunities which may exist in that market.

Given the way in which the market has developed, would you be emphasizing more the E cigarette now rather than heat not burn, or has that not really changed?

Because originally I think the first couple, the first two platforms that you thought you could bring to market were heat not burn.

I think E cigarettes as they are today I don't think the situation has changed much regards our assessment as of some time ago.

You need to have a product which is palatable to the consumers.

The product has to liked by the consumer.

I don't think the cigarettes today are delivering on that promise.

Heat versus burn clearly addresses both the element of the heart reduction and delivers on the taste expectations of customers.

I think heat versus burn in other opinion is a closer to this idea of sort of a product which you should have in the market.

E cigarettes, as I said, look like (inaudible) every days of the category development so the more focus on investment is needed in order to bring the palatability, again, of this product into some level of acceptance by consumers.

We see these cigarette in some markets, essentially in the EU in some markets, not in all EU.

There is an awareness.

It confirms that there is some need for the consumers, but we also have to remember that the (inaudible) days of the cigarette are in the environment when there was no tox.

What I see in some countries is much more a phenomena of the pricing rather than a phenomena of the high reduction or pace.

People are compromising because they get the discount versus a cigarette going into 40%, 50%, or 70% rate.

Its nothing substantial.

I don't think we could call it substantial at this stage, but (inaudible) days of the cafe goers.

So we continue working on our three platforms and we making a progress as per plan.

And I think when we're be ready, we will go to market.

Okay.

Thank you very much.

Michael Lavery, CLSA.

Just looking at your Business in Indonesia.

The volume growth in the first half was about 2%.

If it is 4% for the year, obviously that is a pretty sharp acceleration that you would expect.

I know the comps get easier, but you have also got some potential consumer headroom with higher fuel prices, and those getting passed through to other products, and then some big competitive launches.

So, what do you see driving an acceleration in category growth there?

Well, we expect 4%.

But no one can say that offering a quarter ago would have been a more closer to the 6% of the growth.

So, we know where a little bit of our expectations for the market.

4% is about the historical average growth of that market.

If I may take out the last very exceptional -- the last two years, which were very exceptional.

I think the fuel subsidies, a part of that thing was mitigated by the government by returning some subsidies in other forms to the lower income people.

I think the opening of the year was a bit slower.

1%, I think, was the growth rate of the market in the first quarter, which was presumably more impacted by some spikes in the food prices in Indonesia.

I think it is doable.

It is actually somehow reflects the pricing of the seasonality, if you like, pacing of the development in the market.

I think a 4% for the market should be doable for the tougher market Our volumes in our market share is pretty strong.

Not as strong growth as the last year, because we are leaving some attractive price points behind us.

But was still for the first half a year.

In the second quarter, first quarter we had a nice share advancement.

I think we can expect some share growth, moderate share growth going forward in the year.

And then at the category level, is it the easier comps that are the big driver for the acceleration in the second half?

Or is there anything else to that?

No.

I think the market is slowly going to historical growth rate.

It is just the pacing of the quarters.

And then, just back to Japan.

For what you expect that is factored into your guidance.

Would you need to regain share there to be on track for what you expect that's reflected in your guidance, or do you have it where you just need to hold?

I realize the pacing in this past quarter had an impact.

Is your expectation that that's going to swing back, or do you not necessarily need that to happen?

No.

We put into our guidance, or we included in our guidance some understanding that the share in Japan is going to be under pressure.

I won't give you the number what is the exact share we are targeting for the year.

We do recognize that there was a pressure on the share, on the market share in Japan.

As I said, we still have a few initiatives to be launching in the market.

Let us see how the whole thing unfolds.

At the Q3, we presumably will have a better position to say what is the realistic share expectation for the full year.

I realize it is early in the quarter.

Only just a little over a couple weeks, but in Japan, specifically or any major markets, have you seen trend so far that look like an acceleration?

Specifically, in Japan, has there been from the consumer retail share trends that look more promising that suggest you will see the shipment share regain some ground?

No, no.

As I said earlier, the biggest challenge which we will have this year is the total market.

The total market you need a little bit of time to estimate properly, not on the weekly basis or biweekly basis.

We are pretty confident in our shares.

I said we are pretty confident about the pricing, but we will have to see how does this unfold in the remaining two quarters of the year relative to the total market sizes.

This is what it is.

But, nothing at the beginning of this month which would focus from a perspective that in our guidance, so outlook for the second half of the year would to change versus what we just announced.

Okay, great.

Thank you very much.

Thank you.

Chris Growe with Stifel.

Hi, good morning.

Good morning.

Just had two questions for you.

I wanted to ask a little bit more about Europe and just understand, through the core this is a better volume performance than I expected, actually.

Seems like it got sequentially better, given you had a pretty soft April.

The expectation, where you have increased your estimate for the decline for the division for the year, do you expect conditions to worsen in the second half of the year or remain about the same?

I guess I last saw in the quarter was an improvement throughout the quarter?

Yes, delayed.

We had total industry was, if I remember, 10% down in a Q1, 8% down so you had a blended 29.3% for the first half of the year.

So, yes, even without a revised the outlook for the full year, we do assume that there will be some improvements going forward.

It's a little bit of a comps, but sequentially we see that the volume -- we had exceptional low quarter first quarter, okay?

So, this is already in the books.

You can't change this one.

But, yes, there was some sequential improvement in the quarter.

Another thing to look at our shipment today much better than the market, because EU has delivery, fabulous market share performance first quarter and the second quarter.

And it is very much on the back of Marlboro.

You remember, Chris, in the past I said EU it has been acting much more total market and it makes problems for us.

Yes.

But that at least a part of a positive news about the EU performance this year.

I had just one follow-up question for you, which is on the investments that you have made over the last year in Russia or in Indonesia, those kind of markets or even behind the Marlboro brand overall.

We will be lapping a lot of those in the second half of the year.

Do you expect that those investments then are going to remain at the same level or do they start to come down on a year-over-year basis?

Is that a benefit of the second half or is it just less of a drag, if that's the way to say it?

No.

What I'm saying the second half of this year is going to be more comparable to the second half of last year, therefore my volume is going to be flat.

Yes, on a the full 12-month basis this year you will see that we have increased year on year.

However, the pricing of the thing was that we started to accelerate it, increased the investment in the second half to the fourth quarter in some places of last year and therefore I am lapping now in the second half of this year.

Okay.

You quantify the degree of investment you have made over the last year, let's say, of what your increase was overall in sort of marketing, distribution, those kind of areas.

I wish I could.

And I know the number, but I am afraid so many people know when I call (inaudible).

Understood.

I thought I would try.

Thank you.

Thank you.

Vivien Azer with Citi.

Hi, good morning.

Good morning.

My first question has to do with Indonesia.

Your guidance for 4% volume growth has come down pretty sharply in just a little over a month.

What gives you comfort that that 4% is the right number to the extent that you see continued food inflation in that market?

Well, we got the reading now of the second quarter.

Yes, the second quarter came nicely in.

The volumes grew by, total industry volumes grew by 3.5%.

Once you have two quarters, it is a little bit easier to forecast the full year.

So, this is due to this.

I think there was at some impact in the first quarter of the full price for the inflation.

There was some flattening in some regions, territories in Indonesia.

I think all that together might have put the market on a bit of slower opening of this year.

The quarter, sequentially, now should be better, but I think to be more realistic we should rather put a estimate of the total market in this range of the 4% rather than stayed with the previous one.

When we, frankly speaking, 4% is a very solid, nice growth rate for this market.

We are okay with this.

Sure.

In the EU, you had previously stated that you had hoped to hold your local currency EBIT flat with your prior volume assumption.

Can you give an update on that outlook for local currency EBIT growth in the EU.

Well, EU again, I mean they improved sequentially.

The total industry improved in the Q2.

I would say maybe initially we thought the improvement is going to be more than just 8% decline.

I think once you have a 10% and 8% in the pocket already in actuals, well then you have to -- again, you are in the same situation is that you better can predict what the forecast what the full year is going to be.

There's not much improvement on the contraband.

We don't have the full reading for the -- where the illicit trade stands.

However, when I talked to the markets, when we meet the markets, as many markets indicates that the contraband daily situation continues to grow.

All is not easy.

France, I think, is one of the recent examples in the illicit trades spikes, continues to grow.

All in all, I think to be more realistic, we decided to revise the outlook for the industry.

Maybe it is going to come better, I don't know.

A biggest challenge, I'm repeating another time -- the biggest challenge we have this year is the total size of the industry.

It is not our business performance, it is not our ability to deliver strong pricing.

It is not our ability to manage the cost, the investment et cetera.

It is essentially the total industry volumes.

Fair enough.

My last question has to do with E cigarettes, as well.

Do you have an estimate on what impact E cigarettes could have had for the total EU, or may specifically for some of the markets where it is bigger.

And you just called out France where you have seen a sequential acceleration in the market declines on a substantially easier comp.

And as I understand it, that is one of the bigger E cigarette markets in the region.

I would not give a number.

We are looking at that carefully because, as you know, one of our platforms is for E cigarettes.

It is not that we not closely looking at this category.

It is difficult to give estimate.

You have this some places information and some travel to Italy, to Rome, and have seen now, which is France, in the cigarette.

You go 100 kilometers outside Rome and no one cares about E cigarettes.

We have to look at this -- I make total sort of the information with a little bit of a caution.

I don't think -- of cautiousness -- I don't think today the size of the market of E cigarette in New York is in a range higher than a 1%.

And presumably, that might be even on a high side.

I don't have a number.

It is pure speculation.

You expect to -- I think we need the more time to really assess the effect.

I don't think it is comparable to what you have, for example, in the US.

New York (inaudible) that is a little bit in London, but you go in a few other towns outside London, not necessarily is the case.

I had it historically in Greece and this was just another alternative to smoking that significantly lowered -- to lower price.

Then the dissatisfaction came and the market disappeared, whatever was the market at the beginning.

This is various stages of the category in Europe.

As I said, we are very closely watching the thing and looking for varying ways the right moment to enter market can create opportunity for us.

I would not volunteer, today, to hand a solid number with regards to the impact of E cigarettes, the size of E cigarettes in Europe.

Thank you.

Thilo Wrede with Jefferies.

Is this the most challenging environment that you have operated in since the spinoff, or is it too much a pessimistic interpretation of your results?

It's challenging.

The whole year is challenging.

The different challenges in a different year.

Like a retrospect, we're presumably -- listen, we are much more focused.

We keep an eye on the ball.

Quarter two is Quarter two.

We reported Quarter two.

I am glad it is over.

We focus on a quarter three quarter four in 2014 and into 2015.

At the retrospect we will just treat it as the quarter.

We are not managing the business at the quarterly basis.

So, for us it is much more now how we are confident about the full year, what is in front of us for the 2014, '15, et cetera, '16, '17.

We have a lot of exciting things in front of us.

I understand the interest around the quarter, but would not be over excited about the quarter.

You would not say that the overall operating environment is any worse than what you have seen the last five or six years?

It is challenging environment.

The challenge is the total market sizes.

There is some other years you had other challenges.

Business was not performing then.

If you go back to the [spring] time, a week today much more confident, much, much more confident in our ability to grow market share, to grow Marlboro, to be innovative, etc.

I don't think we were that strong, had a such a strong feelings about that part of our business in the 2008 or 2009.

Listen, business is business.

You always have some challenges.

Fair enough.

We don't want you to get bored, friend.

Another question I had for you, Jacek, is can you give us an update on the impact of plain packaging in Australia?

As you know, from the total market perspective and the market share, the market was slightly down by the mature market.

I don't think there is -- we can really give you more of the inside when they talk about plain package.

There is some acceleration of the down trading.

Is it attributable to plain pack?

We will have to see.

But there is some down trading, although the market is pretty expensive market in terms of the level of the prices.

Prices went up.

We have seen the down trading before the plain pack.

Plain pack in a (inaudible) down trading, yes, there is a risk.

We always are pretty open about.

Wouldn't conclude that sort of a statement just based on one quarter?

In Australia it is double up and nicely strong.

Right.

Any changes to the illicit trades in Australia that you can see?

No.

No.

No.

All right.

That is all I had for you.

Thank you.

Erik Bloomquist with Berenberg.

Hi, good morning, Jacek.

Good morning, Erik.

I would like to circle back to Russia, and just firstly, the reason for the decrease in the outlook for Russian volume.

It sounded like from your previous comments that's really due to a change in the macro environment and the effect that is having on consumer disposable income.

I was hoping you could help clarify that.

And then secondly, I was wondering if there is a sense that the Russian government, with this greater decline in volumes now, will be taking that into account as they look at tax rates going forward at the end of the year?

I think when it comes to the market as what we see, we have a slowdown in the economy.

Russia has still the quarter's report in the quarters of GDP growth.

But the growth dynamic is different than it used to be in the past.

But there is a slowdown in the economy.

There is clearly less governmental spending, which presumably also goes back into that overall stage of shape of the economy.

There is clearly a no other wage dynamic.

The wages I've got in quarter in Russia, but not at the rates last year or year before.

And for the first half of the year, I think the utilities prices, prices for utilities, water, gas, fuel, et cetera, went up, I think, in the range of about 10%.

I think Russia is an inflation of about 7%, 7% to 8%.

So, clearly above inflation.

And above the rate of the growth, which we excelled last year, because first half of last year utilities were up by about 5%.

There is something around the consumer purchasing the power or disposable income, which we are confronted with.

Now, Russia is -- a good thing about Russia is we have a good tax structure and we have a visibility of a taxation for the next three years.

Next year there is still in front of us quite a sizable tax increase, which we would like, we would like to pass, to pass onto consumers.

It is likely about this year, because the ink part of this year the pure tax was about RUB5, if I am not mistaken.

And we have in front of us about RUB8 of the tax increase, just tax increase, for the market.

So, I don't think the government will change this one.

In the outer years of the long-term tax plans, the government may take the different view of (inaudible) taxation.

But anyway, in the plan there is moderation, because the 2015 to '16, at least what we understand, the taxes should go at a lower rate than this year and the next year.

One thing which we have to watch for Russia, because this our experience from other places.

And I hope the government also will carefully look at that, is the illicit trade.

Okay, because here what is such a situation now to open the door to illicit trade.

But I hope the Russian government and the Russian administration will defend strongly their -- the legal market in Russia.

Okay.

Thank you.

My last question was with respect to the evolution of the TPD as you see it at this stage, given the various entities who have had a first go at it.

And then, related to that is, what looks to be the risk of plain packaging in Ireland, given the UK's decision to abandon that policy?

Thanks.

Well, logically, Ireland should follow the same thinking as the U K. Let's wait for the evidence and don't abandon your -- make sure that the legislation you propose is sound from the evidence or science perspective.

The process in Ireland has not started.

We just heard that they have an intention to look into plain packaging.

All this has been a much to realize I can say on the TPD I think the whole debate about tobacco product directive will happen at the plenary sessions of the Parliament around middle of September.

Now, depends how the outcome of how the directive is going be for at the end of the parliament versus what the Council has decided and then it will go to through the reconciliation process.

I think we will know the final shape of the directive, say, before year end.

Maybe early next year.

Around the year-end and then you will have about two years for the transposition into member states.

We will have to see what transition period.

The member states will give in the domestic markets and the domestic jurisdictions.

It is difficult to say.

Now that you've seen you have the number of the committees in the Parliament, their opinions are highly divided.

It is not that there is unanimous support for the ban of (inaudible), menthol, et cetera.

But I don't know, it is difficult to speculate at which shape the directive it is going to know (background noise).

Great.

Thank you.

Rogerio Fujimori with Credit Suisse.

I just have one quick question in the context of the proposed UTBD changes.

Could talk a little bit about Poland.

We know that 20% is menthol and nearly 30% is Slims.

Would you expect some smokers to switch to other cigarettes if and when the ban is in place, or is more likely that we will see a surge in illicit volumes from Eastern Europe?

Thank you.

I think it is hoped that it enforced the (inaudible), the illicit trade.

I think some customers can go and find similar products in the illicit market already today.

This was one of the arguments which we were bringing to the EU officers other than members state that first of all, there is no scientific place to buy any of these product.

It is a pure discrimination in the market without any scientific breaks.

If is difficult to argue that the super slims are more harmful than or less harmful than the regular cigarettes.

Here there (inaudible) of illicit trade.

Some customers and I say speculation, but some consumers will go back to regular cigarette.

In some countries in Europe, customers also know how to mentholate cigarettes themselves.

So, I don't know in which direction it is going to go.

Just any design the policy if this stays like it is, will not improve, will not deliver on the stated objective, but yes, this will create a distortion in the marketplace.

Let's see how that is unfolded.

Thank you, Jacek.

Ann Gurkin with Davenport.

Morning, good afternoon.

Thank you for the question.

Hello.

Now that we're two quarters into the year, is there any change in the contribution from pricing variance for the full year versus expectations when we started the year?

The pricing variance, the billion hedges indicate that we are looking for the very strong pricing variance for the full year.

So, no.

Okay, great.

In the release you comment on lower industry volume.

I understand that is reflecting excise tax increases, trade inventory movement, illicit trade, et cetera.

But is there any fundamental change in consumption patterns in any markets that is contributing to that lower volume for total industry?

No.

It is presumably that, as I said, the biggest challenge this year we have on the total industry volume.

I think the price increase, which is taking place, there is not something significantly higher than in a previous years, if you use the averages, et cetera.

I think what we confronted is that in some geographies we have -- we are confronted with the slowdown of economy, the difficult market, et cetera.

Whenever you have an erosion in the disposable income, that has an impact.

Illicit trade, obviously, starts to play more important role.

This is a challenge which we have.

Illicit trade in the form of a difficult contraband crossing the borders.

Also in some places like Philippines there are no law enforcement, which result that some people don't pay a taxes which they should pay.

And that's another phenomenon which we are confronted with.

But in terms of the consumption part of smoking incidents, you can look at the mature market.

Yes, there's a natural rate of a decline, but nothing which you would today attribute, this is a year when the people -- the incidents goes down faster.

The daily consumption rates decline faster.

Actually, many countries take us out in Europe, et cetera, the smoking incidents in many countries stays flat, and the daily consumption stays flat of the total tobacco product.

That is great.

That helps.

Thank you very much.

Thank you.

David Hayes from Nomura.

Good morning, good afternoon, gentlemen.

Just in terms of picking up on the comment you made earlier about the price lags by some competitors.

You mentioned Russia and then some other markets you'd seen.

Two questions on that.

One is, is that something you feel in some of that price lagging is a bit of a growing trend?

And then secondly, is there any markets apart from the Philippines which you called out where you have actually reversed pricing, haven't taken pricing during the year?

Thank you.

The price lagging here it happens every year in different places.

Sometimes it is a month, sometimes is a couple of months.

Even the Russia was a little bit on the longer side.

So, that is clearly, I know even something which put the pressure, but finally prices were implemented.

It is more of the tactics rather than I think the sort of a strategy.

And second question, no.

It is just Philippines, when we had to do better to specific situations when we have to react with the price.

Okay, thanks.

So, just on -- just pick one of these cigarettes and come out some of those comments earlier.

My understanding, at least, is that your plan is to come into E cigarettes/next generation products commercially 2016/'17.

Is that still the understanding or are you saying that if the market develops further you are positioning ourselves to come in with other products ahead of that chronological process that you talked about in the past?

To be precise, we have said that the 2016/'17 it was focused on the two platforms.

The first two platforms.

This is where we will start their construction.

The factory this year, etc.

But we working, essentially, at the same time on the three platforms.

They are in a different stages of development, of even the platform third.

That platform which is a ways at posthole S, can be treated as a cigarette, is also on our agenda.

I can see you could come to market with something commercially in that area earlier than 2016, potentially?

When we will go to the market, we will announce when we will be go-to-market.

Okay.

And then, my final question just to clarify, I guess, just in terms of the guidance and some of the trends that people have highlighted.

You talked about the fact that these markets, Indonesia, Russia, EU, Turkey, obviously, the volumes have lowered since the beginning of the year in terms of outlook.

But then you just made the point that pricing wise you have not changed your outlook since the beginning of the year in terms of the pricing you expected to take through the year.

I'm just still trying to equate why the guidance is so, is unchanged.

What the moving part is that offsets that volume declines that you've seen in a number of key markets that you've mentioned today?

Listen, as the guidance has a -- we are taking into considerations elements that we knew at that time.

The pricing at the beginning of the year, if I am not mistaken, we had about 75% of the pricing realized.

We knew what we going to have in the pricing.

There was some prices also change more recently, some a little bit earlier for different reasons than the timing of the price increases has changed etc.

The whole guidance is a blended all number of the factors.

But is it fair to say -- there is also maybe a little bit less expenditure plans since this is the beginning of the year or more cost-savings, potentially?

Is that an area where the $300 million can actually be higher to help delivery.

The cost saving in terms of productivity to plans of the $300 million.

We delivering on a long schedule.

So we had it already in our guidance.

And no.

I said there was a comp.

We knew that we'll have that comp in the second half of the year much better than the first quarter of the year.

Those factors were in the guidance.

Okay.

Thank you very much.

Thank you.

Thomas Russo with Gardner, Russo, Gardner.

Hi, Jacek.

Just quick questions.

One involves the pension liabilities in light of the rise of the long-term interest rates, the funded status might lead some restatement upwards or downwards of the liability.

I am curious about that.

Second, in Spain, what steps can you take?

It sounded like the cigarette volumes are down 12% and the roll your own were up 26%, I think you said.

That is quite a staggering direction.

Any steps underway to reverse those trends.

I think the first one is very short.

All our pension funds are well funded and are well above the statutory limits.

If I read your questions properly, we don't expect any prices on the [phone].

When it comes to Spain, yes, clearly the government going into finally recognize that there was a too much of the gap between taxation of the earlier one and that manufacturers of cigarettes is very helpful.

In a few quarters, we should see, very hopefully, some improvement.

I think we were still in Italy when the government taxed earlier one fine cut products a little bit a more.

You could see already now that you have some reverse of the trend, which is obviously helpful for our cigarette, one (inaudible) cigarette, whatever.

In Italy the numbers seem to indicate that.

That was good.

What is the level of market share for roll your own in Spain at this time?

I think it is in the range of 12%, if I am not mistaken.

Okay, thanks, Jacek.

Thank you.

Chris Barrett with Bloomberg News

Hi, thank you for your time.

I wanted to ask, are you surprised by the volatility and the movement in currencies?

And are there new steps or additional steps that you are taking because of this?

Well, I think I am surprised as everyone else is surprised, because the whole market this day is volatile and my people are reading every announcement from every central bank and the reactions are the same.

You see in our announcement, our outlook for the currencies revised by -- mainly for the because of the Russian ruble, Mexican peso's trillion dollar, et cetera, and actually on the Japanese yen and on the euro, we already had work pretty well hatched at the beginning of the year.

There were some opportunities during the year, because the currency was very volatile.

And we used these opportunities, so we feel much more confident about the yen now than the euro.

But the rest of the currencies, yes, there is a volatility in the market place.

May I ask you one last question on electronic cigarettes?

Could you give me a -- give a little color on how they fall short to the taste and the feel of a consumer?

And would you go as far as saying that the popularity, that demand for E cigarettes may actually falter over time?

They may not become as big as some project?

Well, what we hear and also (inaudible) if I think the product's working.

The product is not a product which is very close to the conventional cigarette.

And I think the consumers are looking for something which is at least similar.

So the product has its own no taste efficiency.

(inaudible) so everyone is working on how to improve it.

Years from now the situation might be different.

But as today, I don't think that the product is performing well on the taste side.

It is pretty tasteless.

And in the locations, it is also the question of a good manufacturing process practices.

The product is not regulated.

I don't think the consumers had a confidence with what they buying is really something which they would like to use.

Incidentally, I think today is much more the phenomenon of the price then anything else.

And when a price comes to play, consumers are willing sometimes to compromise a lot.

Will it last long?

I don't know.

It remains to be seen.

Thank you for your time.

Thank you.

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

Well, thank you very much.

That concludes our call.

I apologize for going over a little bit, but we did want to make sure that we took all of the calls that were in the queue.

If you do have any follow-up questions that you can contact the Investor Relations team.

We are here in Switzerland.

The numbers are posted on our materials.

Again, thank you all for joining us.

Have a great day.

Thank you.

This concludes today's conference call.

You may now disconnect.