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Executives

Louie Camilleri - Chairman & Chief Executive Officer

Hermann Waldemer - Chief Financial Officer

Nick Rolli - Vice President of Investor Relations and Financial Communications

Analysts

David Adelman - Morgan Stanley

Adam Spielman - Citigroup

Judy Hong - Goldman Sachs

Jonathan Fell - Deutsche Bank

Christine Farkas - Banc of America

Erik Bloomquist - JP Morgan

Thilo Wrede - Credit Suisse

Chris Growe - Stifel Nicolaus

Jon Leinster - UBS

David Hayes - Nomura

Ann Gurkin - Davenport

Philip Morris International Inc. (PM) Q4 2008 Earnings Call February 4, 2009 11:30 AM ET

Operator

Good afternoon and welcome to the Philip Morris International 2008 fourth quarter and 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 would now like to turn the call over to Mr. Nick Rolly, Vice President, Investor Relations and Financial Communications for Philip Morris International. Please go ahead, sir.

Nick Rolly

Welcome. Thank you for joining us. Earlier today we issued a news release containing detailed information on our 2008 fourth quarter and full year results. You may access the release on our website at www.pmintl.com. As we take you through our call today, we will talking about results in the fourth quarter for the full year 2008 and comparing them with the same periods in 2007 unless specified otherwise.

References to volumes are for Philip Morris International shipments and net revenue data exclude excise taxes. You will find data tables showing how we made adjustments to revenues and operating company’s income for currency and acquisitions on the last two slides of today’s presentation which will be posted on our website.

Prior to 2008 certain of PMI’s subsidiaries reported their results up to 10 days before the end of December rather than on December 31. During 2008, these subsidiaries moved to a December 31 closing date. As a result the first and fourth quarter results of previous periods have been revised to reflect this change and we have provided the revised quarterly information for 2007 and 2008 on schedules nine through 12 of today’s earnings release. The effect of this change for the year was not material to PMI’s consolidated financial position, results of operations or cash flows.

Today’s remarks contain forward-looking statements and projections of future results and I direct your attention to the Safe Harbor statement in today’s presentation and news release for a review of the various factors that could cause actual results to differ materially from projections.

It’s now my pleasure to introduce Louie Camilleri, Chairman and Chief Executive Officer; and Hermann Waldemer, Chief Financial Officer who will join Louie for the question-and-answer period. Louie.

Louie Camilleri

Thank you, Nick. Good afternoon ladies and gentlemen and thank you for joining our review of our first full year results as an independent company, as well as our expectations and guidance for 2009.

In March, we shared with you our mid to long term volume and constant currency targets for net revenues, operating income and earnings per share. In 2008, we achieved or surpassed all of them. We plan to do the same in 2009, but as I shall discuss later, our results this year will be adversely impacted by significant currency hit, should current rates prevail throughout the year.

In the fourth quarter our cigarette volume growth momentum continued, with increases of 2% and 0.6% excluding acquisitions. As a result, for the full year, our cigarette volume was up 21.1 billion units to 869.8 billion, representing a growth rate of 2.5% and 1% excluding acquisitions. This marks a significant improvement over our performance in recent years and was achieved despite above trend market declines in the EU region and Japan.

Emerging markets were the principal growth driver of our solid volume performance, with particularly strong results in Algeria, Argentina, Bulgaria, Egypt, Indonesia, Korea, Mexico, Russia, Turkey and Ukraine. In these markets, we benefited from overall industry volume growth and consumer up-trading to our premium and mid priced brands.

This dynamic continued through the end of the fourth quarter. Illustrated by the fact that during the quarter, our revenue growth excluding currency in key markets such as Argentina, Indonesia, Mexico, Russia, Turkey and Ukraine remained robust and essentially in line with and in several cases exceeding the annual trend.

As of yet, we have not witnessed any evidence of a shift in consumer behavior in our principal emerging markets. While the rate of up-trading appears to have slowed in very recent weeks, in some markets and most noticeably in Russia, no sign of consumer down trading has yet been detected. This is obviously good news.

We must however recognize that the year has barely started and the global economic crisis is still unfolding and accordingly, there is no certainty that these trends will be sustained. Having said that, we believe that any shift were it to happen, would be mitigated by both the fact that the premium segment is still of moderate size in numerous emerging markets and that absolute and relative retail price levels have not reached prohibitive levels.

Net revenues in the fourth quarter grew by 3.6% on a reported basis and by 5.6% excluding currency and acquisitions. For the full year, net revenues were up $2.9 billion to $25.7 billion, representing a growth rate of 12.7% on a reported basis and 5.6% excluding currency and acquisitions. Net revenue growth has been driven by our good volume performance, significant increases in prices across all regions and a favorable product mix. Of particular note, is that the organic revenue growth in the fourth quarter was equal to that at the full year.

Operating companies income or OCI in the fourth quarter suffered a substantial currency hit and was essentially even with the corresponding prior year period. However, excluding acquisitions and currency, OCI was up 7.4% or $171 million, in spite of the increased expenditures of some $100 million in brand building in several key markets including Indonesia and Japan.

For the full year, OCI reached $10.4 billion, an increase of $1.5 billion or 16.7% and 9.9% excluding currency and acquisitions, surpassing our constant currency target for operating income growth of 6% to 8%. Income growth was attributable to stronger volume and a significantly better mix than in previous years, a $1.2 billion pricing contribution and productivity initiatives. In addition, OCI was lifted by favorable currency of $481 million for the full year.

Adjusted EPS declined by $0.01 or 1.4% in the fourth quarter, but we’re up a strong 12.5% excluding the adverse currency impact incurred during the quarter. For the full year, adjusted earnings per share of $3.32 were up $0.52 or 18.6% and excluding currency rose by 13.2%.

Discretionary or free cash flow, defined as operating cash flow less capital expenditures, reached $6.8 billion in 2008, an increase of $2.4 billion or 52.7% compared to 2007, despite higher capital expenditures, related in particular to the establishment of new factories in Indonesia and Greece.

This very strong cash flow performance was attributable to our strong net income growth, the optimization of our supply chain and a lower use of cash to fund working capital, reflecting a partial resolution of forestalling issues. We expect that our cash flow in 2009 will benefit from our continued focus on all elements of our working capital and thus should exceed our net income performance.

Our balance sheet remains solid. Our year end net debt to EBITDA ratio stood at 0.94:1. In our debut year, we successfully accessed the capital markets and issued $10.1 billion of bonds at various well laddered maturities and currencies for an attractive aggregate interest cost of 5.8%. Our continued and uninterrupted ability to tap the commercial paper market at particularly favorable rates underscores our recognized credit worthiness.

Our resolve to reward shareholders has remained steadfast despite the financial market turbulence. We raised our dividend by 17.4% in August, to an annualized rate of $2.16 per share, inline with our target payout ratio of 65%. Our share repurchases totaled $5.4 billion, ahead of our timetable for our two year $13 billion program ending April 2010.

One of the key benefits that we expected from the spin-off of PMI was faster decision making and speed to market, the fostering of a greater entrepreneurial spirit, more effective execution and a focus on innovation. Marlboro’s performance is testament to our progress in these areas. Indeed Marlboro achieved a 0.2 shipment volume growth in 2008, with gains of 2.8% in the EMEA region, 6.4% in Asia and 4.1% in Latin America and Canada, more than offsetting a decline in the European Union region of 6%.

Marlboro’s improving momentum is underscored by its volume growth of 2% in the fourth quarter and we are confident that in spite of the current difficult economic climate, we will further strengthen and grow Marlboro going forward. Marlboro’s brand architecture, supported by three key pillars which we have described to you previously, is in full construction mode and early signs in each affected market are exceedingly promising.

Let me provide you with a few examples of initiatives that are in place in numerous markets and that will gradually be rolled out geographically. Marlboro Filter Plus or Flavor Plus is now available in 20 markets. It has garnered significant consumer interest and enhanced Marlboro’s vitality.

It has been particularly successful in Rumania, where it has captured a 2.5% national share and a 4% share in Bucharest in December. In Moscow it now has a 1.2 share, in Almaty, Kazakhstan a 1.5 share and a 0.6 share in Kiev. In November it was launched in Japan and has already captured a 0.3 share.

Marlboro intense, which is also named compact or pocket pack, is now available in the 11 markets. In December it enjoyed a national share of .6% in Spain and 0.5% in Italy, with stronger shares in key urban areas and an attractive demographic profile.

Several launches of the new gold pillar have been executed to-date. Gold edge, Marlboro’s first ever slims offering, is now available in Hungary, Poland, Russia and Ukraine and has already got a 0.4 share in Brussels.

The new Marlboro gold offer is currently being expanded nationally in Austria, after a very promising test market in Vienna, which witnessed to solid lift in market share. It is also being tested in both France and Italy, in four cities with encouraging results. The test market in France has been supplemented with an additional offering called Marlboro gold advance, again recording positive early signs.

The third pillar which revolves around the concept of freshness is also under construction in numerous Asian and Latin American markets. Initiatives have been launched to date in 19 markets with solid results. These have propelled a 32% increase in Marlboro Menthol and fresh volumes in Latin America. The most successful launch has been in Japan, where Marlboro Black Menthol holds a 1% share of market.

Numerous exciting plans are in place to continue to build upon Marlboro’s architecture in 2009 and beyond. As we have often stated, our brand portfolio extends well beyond Marlboro and each brand has a key role to play as evidenced by their strong performance in 2008. Indeed Parliament and Virginia Slims performed very strongly last year, with volume growth of 20% and 8.2% respectively, driven by their unique product characteristics, premium priced position, innovation and geographical expansion.

In the mid-price category, Chesterfield’s 13.7% volume increase in 2008, more than offsets L&M’s decline, which slowed in the fourth quarter as the new L&M essence performed better in Rumania and Ukraine and L&M continued to be the fastest growing brand in Germany with a gain of 1.9 share points for the year.

Finally, in the low-priced category, our key brands Bond Street, Next and Red & White, collectively grew by 3.8% in 2008. Together with strong local brands, such as Diana Italy and Delicados in Mexico, they provide a strong safety net in the event that consumers were to down trade from mid to low priced brands during the economic recession.

On the acquisition and business development front, 2008 was another exciting year. In October we completed the acquisition of Rothman’s Inc. in Canada. I’m pleased to report that the integration is progressing rapidly and smoothly and we are delighted with this new member of the PMI family. We enhanced our presence in the growing fine cut segment, with the acquisition in June of Interval, the leading fine cut brand in France and we are pleased to announce today the acquisition of the Petteroes brand, the leading fine cut brand in Norway, with a 58% category share.

Yesterday, we announced our agreement with Swedish Match to establish an exclusive smokeless tobacco products joint venture, which will cover all markets outside of Scandinavia and the USA. We believe that such products represent a reduced risk for adult smokers and are very excited about their potential over the longer-term in a wide variety of geographies.

As discussed previously, we continue to pursue a number of business development initiatives and I remain hopeful that some of these will materialize as the coming year unfolds. All-in-all, as I look in the rearview mirror, we had a strong year by any measure and we entered 2009 with a reenergized organization, solid momentum and exciting plans.

Let me now turn to our prospects for the coming year. Regretfully, currency will cast a dark shadow on our financial results, should exchange rates remain at current levels. Since the end of the third quarter, we have witnessed an appreciation of the U.S. dollar against the euro and a steep depreciation in the value of many emerging market currencies, in particular the Russian ruble, the Turkish lira, the Indonesia rupiah, the Mexican peso and the Ukrainian grivna.

We also witnessed huge volatility in exchange rates. For example, the dollar/euro exchange rate traded in a range of 123 to 147 in the fourth quarter alone, making currency forecasting quite hazardous. While we believe that economic fundamentals will pressure the U.S. dollar overtime, we established our EPS guidance for the year based on current exchange rates. As a result, in spite of the strength of our underlying business, our current EPS guidance, including an adverse currency impact of $0.80 for the full year is in a range of $2.85 to $3, compared to our EPS of $3.32 in 2008.

Let me illustrate the extent to which currency movements within the last month have impacted this guidance. At the spot rates prevailing as recently as mid December 2008, our EPS guidance would have been $0.40 higher. Excluding the impact of currency, we expect EPS growth to fall within a range of 10% to 14% in 2009 and we’re confident that we will be able to achieve our volume and currency neutral targets again this year, namely volume growth of 1% to 2%, net revenue growth of 4% to 6% and operating income growth of 6% to 8%.

Our confidence is based on our solid momentum and the strengths of our fundamentals. We own seven of the top 15 international cigarette brands. Our superior brand portfolio is led by Marlboro, which remains the only true global cigarette brand and it has demonstrated its growth potential following our renewed focus on innovation and the development of the new brand architecture.

We believe we have the greatest global reach and the best geographic balance in the industry between mature and emerging markets. The spin-off has enhanced our speed to market and our flexibility. Our ambitious productivity program is generating substantial cost savings and we believe that the excise tax and regulatory environment is manageable, with no immediate and potentially disruptive threats on the horizon.

Furthermore, our business generates substantial cash flows, which along with our very solid balance sheet provides us with excellent liquidity. We remain committed to return significant amounts of cash to our shareholders during the year, through dividends and share repurchases. We anticipate that our share repurchases in 2009 will essential be inline with the dollar level we expended in 2008.

We are very focused on the fundamentals of our business and intend on delivering industry leading growth. Therefore, while we will do everything we can to mitigate the impact of unfavorable currency, we will not implement any measures that could jeopardize our strong underlying business momentum and sacrifice our long term growth for a short term benefit. Thank you.

Hermann and I will now be happy to take your questions.

Question and Answer-Session

Operator

Thank you. (Operator Instructions) Your first question is from the line of David Adelman with Morgan Stanley.

David Adelman - Morgan Stanley

Good afternoon Louie and Hermann.

Louie Camilleri

Good afternoon David.

David Adelman - Morgan Stanley

Louie, let me start with currency. I obviously and other outsiders try to forecast the adverse currency impact or the currency impact. Clearly I was fairly far off in ‘09 and I’m just curious, is there something other than translation that’s substantial, that’s having that magnitude of a negative impact were there are hedging gains that aren’t replicable, are there transactional issues in the businesses in ’09, etc.?

Louie Camilleri

No, it’s purely translation David. I mean, I don’t know what your models and other models are. My own sense is you have probably underestimated the hit, the currency hit in terms of translation of the emerging markets. If I just take four principal emerging markets; if I take Russia, Turkey, Mexico and the Ukraine, those four markets alone account for some $0.60 of the $0.80 hit and I would suspect that your models probably haven’t factored in such a hit for those emerging markets.

David Aldeman - Morgan Stanley

Okay. Secondly Louie, are you and the board prepared, at least temporarily, to allow the payout ratio to drift above the 65% target in the short term?

Louie Camilleri

Most definitely.

David Aldeman - Morgan Stanley

Okay, good. Thirdly, is there any evidence to date or any realistic risk that some of your global competitors that are based in a market whose currency has not appreciated to the extent of the dollar like the British pound, have been or will be more willing to reinvest in the markets with price competition or greater levels of spending behind their own innovation?

Louie Camilleri

I think you’d to have ask them that question directly David. The evidence would suggest, over the last couple months, and there’s been quite a lot of pricing activity across the world, the evidence would suggest that nobody at this stage is trying to use a currency benefit, to get some sort of competitive advantage. The year is still early, but we haven’t detected anything.

My own sense is that, just the way you haven’t given us much currency benefits in 2008, investors are unlikely to give much currency benefit to our two key competitors who report in sterling. I think that investors tend to look at constant currency growth rates more and more, especially in these volatile times.

David Aldeman - Morgan Stanley

Okay and then Louie one last thing. It obviously doesn’t make sense today to put your the pedal to the floor in terms of raising real pricing in emerging markets, but do you think there’s a lesson to this point, given how well the business has held up versus other consumer goods that just from a secular perspective the industry is giving emerging market consumers too much value, and therefore there is an opportunity over time to substantially increase profitability in these markets?

Louie Camilleri

Well again, that’s potentially an oversimplification David. When has to look at excise tax levels as well, but clearly, as I mentioned in my remarks, in most emerging markets, we’re in a pretty good situation in terms of absolute and relative price levels and that would lead to you believe that there is significant pricing potential going forward. I would want to highlight however, that we have used the pricing leader quite significantly, certainly in 2008, in a lot of these markets and we will continue to do so and our guidance does project quite a lot of pricing across the world.

David Aldeman - Morgan Stanley

Okay, thank you.

Operator

Your next question is from the line of Adam Spielman with Citigroup.

Adam Spielman - Citigroup

Good afternoon gentlemen.

Louie Camilleri

Good afternoon Adam.

Adam Spielman - Citigroup

Can I ask just a clarification that I hope I had it right. You said at the beginning of 2009 there was no change to the trading in your main markets, but then I think you said there have been some slowing of the up-trading in Russia. Have I got what you meant correctly?

Louie Camilleri

You’ve said that correctly, yes, that we have witnessed a slowdown in the up-trading to premium. It used to be sort of double-digit rates, it’s now single-digit rates, but the up-trading continues.

Adam Spielman - Citigroup

Excellent. Second question if I may. I’m talking about in January ‘09, have you raised prices of any of your key brands in any of your major markets apart from Spain and the UK?

Louie Camilleri

If I take, quite a lot of pricing happened in November and December, Adam. So, in a number of markets we’ve increased prices. Russia, Ukraine is going up, Indonesia has gone up, Italy we just launched price increase with the administration, so that should happen within the next two or three weeks. There’s been pricing in the Benelux, I mean there’s been pricing across the world. Mexico has been pricing. I could go on.

Adam Spielman – Citigroup

Thank you. That’s very useful indeed. Thank you very much.

Louie Camilleri

You’re welcome.

Operator

Your next question is from the line of Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

Thanks. Good afternoon.

Louie Camilleri

Good afternoon Judy.

Judy Hong - Goldman Sachs

Louie, if we look at the Marlboro’s volume growth in the quarter, obviously this is the second quarter in a row that we saw volume grow for the brand. If you will look out 2009, I’m just wondering how you think about the sustainability of that improvement.

On one hand, I guess you could point to potentially some weakening of maybe the premium brands. On the other hand, that your market has been under pressure from a Marlboro brand perspective, so potentially there is some recovery that we could expect. If you can just characterize, how you feel about the Marlboro’s outlook, if you look out for the rest of 2009?

Louie Camilleri

Yes. Well, I think as I said in my remarks Judy, if you take the EU and Japan, the market declines in those two territories, we’re above trend in 2008 and we feel that in 2009 we won’t suffer such market erosion, so that’s already a positive. With regard to Marlboro itself, this new architecture that is basically taking place is still very much in its early phase and we have a number of ambitious plans for Marlboro and clearly our plans call for continued growth of Marlboro radio both in share and volume.

So, what you saw in the third quarter and the fourth quarter, we anticipate that that hopefully will continue as 2009 unfolds. In fact, if I look at our momentum, both in terms of OECD and non-OECD markets, the momentum is actually accelerating. So that’s a good sign and we have a number of exciting initiatives this coming year and we’re very hopeful that will all translate into better results.

Judy Hong - Goldman Sachs

Okay and part of the acceleration that you’re seeing in your underlying business momentum, I presume is partly driven by the step-up in the investment that you’ve made throughout 2008 and I’m just wondering how you now feel about the level of the brand support at this point and whether we could start to see more positive operating leverage and some more of the cost savings now flowing to the bottom line, rather than that getting reinvested back into the marketplace, given that the volume momentum that you are seeing?

Louie Camilleri

Listen, we continue to invest judiciously behind the brand, Judy. Our productivity initiatives, we have called back in March for productivity of $1.5 billion, averaging about $500 million a year. We achieved that in 2008. We believe we will achieve in that in 2009. We also I think alerted for sometime the investment community to increases in leaf costs. That will be around $350 million next year in terms of leaf costs, which is part of our guidance. I would say that we are in competitive levels, but given the actions we have for Marlboro in a number of markets we will continue to invest behind the brand.

Judy Hong - Goldman Sachs

Can you quantify how much of the productivity savings you got in 2008 versus the three year target?

Louie Camilleri

We were smack on the number of 500.

Judy Hong - Goldman Sachs

Okay and then finally, just in terms of how you’re thinking about the share buyback commitment, the two year $13 billion you have in place and I know you’ve committed to the dividend rate being higher than the 65% target rate. I’m just wondering if you have the same level of commitment to completing that buyback program.

Louie Camilleri

Absolutely, we have a steadfast commitment both in terms of the dividends and share repurchases. Listen, we have the benefit of generating significant cash flow. As I mentioned in 2008, our cash flow was up close to 53%. We think our cash flow performance in the coming year will be better than that of our net income performance. We have still a very strong balance sheet and we believe that as I mentioned in my remarks, our share repurchases will be essential in line with the ones we did in 2008.

In 2008 we expended $5.4 billion. That was some 25% or $1.1 billion ahead of schedule. So we have the luxury in 2009 and let us never forget that by buying back these shares, we’re also saving the dividend and that should give some comfort to those who are somewhat worried; I don’t know why, but I am told that some are worried about the dividend.

I think if you looked at the history of PMI’s parent, if I can call it that, and PMI, we have always ascribed huge importance to the dividend and the 65% target payout ratio was a target and if that slips above in any given year, so be it. We recognize the importance of the dividends and we have the benefit of a very strong and predictable cash flow, which gives us confidence in our dividend and share repurchase programs.

Judy Hong - Goldman Sachs

Okay. Thank you.

Louie Camilleri

Thank you, Judy.

Operator

Your next question is from the line of Jonathan Fell with Deutsche Bank.

Jonathan Fell - Deutsche Bank

Hi everyone. I have to say excellent, David’s (Inaudible) as well as far as getting the FX impacts wrong. I’m just wondering if you could give us a bit more help for the models. I mean, it looks like you are talking about an overall FX impact if we take the mid range of your underlying growth estimates and the actual guidance. It looks like the FX impact is negative 20%. Is it going to be a similar negative 20% at both revenue and EBIT? Would I be right in thinking that in the EU and Asia the impact’s going to be quite a long way under the 20% and we’d be treating it higher in your region?

Louie Camilleri

Yes, that would be a fair characterization Jonathan. As I say, we’re be dramatically hurt by principally the four markets I mentioned, which were Russia, Mexico, Turkey and the Ukraine. There are others, the Kazakhstan; Tenge was devalued by 20% just today. That’s a $35 million net income hit.

So there are a lot of other currencies that one has to build into the model, but I would say that the four key ones are the ones I mentioned and they are $0.60 out of the $0.80, those four. I mean, the ruble alone in the last month has affected our guidance by $0.20. So 25% of our currency hit happened in one currency in one month.

Jonathan Fell - Deutsche Bank

Okay. I guess on the EU, it looks like we saw a little bit of a deterioration there in underlying shipments and profitability trends in the fourth quarter. Is there anything there which concerns you or is that something that you’d expect to see sort of disappear fairly rapidly going into 2009 and those turn to normal?

Hermann Waldemer

No, I’m not overly concerned; in fact, quite to the contrary. I think we sort of tried to the best of our ability, to point out that the distortions in the EU that were caused by events in both the Czech Republic and Poland. If you eliminate those, as our earnings release points out, the trends are actually okay and in fact if I look at market shares, in most instances the trend is actually pretty good and we’re looking towards a much better year next year, because we’ll have the distortions of the Czech and Poland behind us.

Germany is doing well. I think with the pricing in a few places we’ve narrowed the gap with Marlboro, so we’ll see what happens there and I would say that EU looks today better than it certainly did at the beginning of last year. Let’s forget also as I mentioned in an answer to a previous question that the total markets, we don’t see eroding the way they did 2008 either, because most of the public smoking restrictions that affected industry shipments and consumption are behind us.

Jonathan Fell - Deutsche Bank Securities

Okay, thanks very much.

Louie Camilleri

Thank you, Jonathan.

Operator

Your next question is from the line of Christine Farkas with Banc of America.

Christine Farkas - Banc of America

Thank you very much. Good afternoon Louie and Hermann; a question on volume, just keeping with volumes, could you quantify the trade inventory boost in Bulgaria in the quarter?

Hermann Waldemer

It wasn’t major. It was essential 500 million units.

Christine Farkas - Banc of America

Okay, great and then just broadly speaking Louie, speaking of excise taxes, I guess around the world, would you expect these generally to accelerate over ‘08 next year?

Louie Camilleri

Well, you would think that because of the economic crisis, governments would want more revenues and excise tax revenues from tobacco. So far we frankly haven’t seen any dramatic increases. In fact in a number of places, legislators have voted down increases because of the economic crisis, so it’s working both ways in a way.

Where we have seen increases, they haven’t been dramatic Indonesia is one example, where there has been a tax increase. It’s roughly up 7%, which is sort of in line with what we've seen in the past, but very importantly the structure of the tax and the eventual gradual harmonization of the tiers continues, so that’s good news.

In the Philippines they’ve called for a tax increase to try to buttress the budget deficit. It’s being discussed in parliament now, but there are a lot of voices calling for no tax increase. Japan, was probably the best example. I know a lot of investors were very concerned about a tax increase in Japan. Whilst it’s not over and we’ll know at the end of March, but the tax committee has recommended no tax increase on cigarettes in Japan and that committees recommendation has never historically been changed.

Christine Farkas - Banc of America

Okay, that’s helpful. Moving to your brand spending, you called out about $100 million in brand spending, so it looks almost like a one-time and I know this question was sort of asked; is this something that’s stepped up now into your base or do you think that this is specific initiatives around specific initiatives in the year and of course we’ll lap this in a year’s time?

Louie Camilleri

Well, they are clearly specific initiatives linked to some of our brand launches, but also I think that was part of it, particularly in Japan, was to make us or render us more competitive in the inconvenient store channel. I think we’ve mentioned this in previous calls, there’s been a dramatic shift in the market in Japan from vending to convenient stores. Convenience stores in 2007 used to represent 40% of consumption; in 2008 it was 60%. So they’ve taken on a huge importance and the competitive battlefield has moved to the convenient store. So we need to be equipped to be able to compete in these key outlets. That is one example.

Christine Farkas - Banc of America

Okay great. Now, finally on snus given your arrangement with Swedish Match, my question to you is where are the key market that you see as appealing in the near to intermediate term? And should we view this as perhaps seeing some sort of signal that the EU may lift the ban?

Louie Camilleri

Well, we are hopeful that the EU will lift the ban and we will do everything together with Swedish Match to ensure that that ban is lifted. There are very strong arguments to lift it and if you go back to the origins of the ban, it was essentially a protectionist measure by what were the Mediterranean monopolies at that time. So, they had nothing to do with health; it was just pure protectionism.

I would be weary to give you specific markets at this stage as to where we will focus our attention, but as things developed you will be the first to be informed of where we’re going to launch and how for obvious competitive reasons, but there are a number of markets where we can launch news today that we will explore and study very carefully.

Christine Farkas - Banc of America Securities

Thanks so much, Louie.

Louie Camilleri

Thank you very much Christine.

Operator

Your next question is from the line of Erik Bloomquist with JP Morgan

Erik Bloomquist – JP Morgan

Good morning.

Hermann Waldemer

Good afternoon, Eric.

Erik Bloomquist – JP Morgan

Just wanted to drill into a couple markets then; with respect to Germany, could you update us on where things stand with respect to potential increase in the stick count?

Hermann Waldemer

Yes, we understand that there’s quite a lot of movement on that subject. Within the German administration and we’re cautiously optimistic that decision will be announced in the not too distant future. So, that is excellent news.

Erik Bloomquist – JP Morgan

Okay, super and then are there discussions, I suppose you can’t comment directly, but it seems to us that the French pricing environment is one in which would make sense to further move price points above current levels. Are there discussions with the French administration on improving the revenues for the French government?

Louie Camilleri

Regretfully no, not at the time being and I regret to say this, but unfortunately in the last quarter of last year, one of our competitors publicly went out and said that the government was considering a price increase to generate higher revenues, at a moment where the economic crisis was unfolding. The government actually denied that, asked us denied it, which we did and regretfully we’re sort of stuck in limbo at the moment. Having said that, our hope is that as the months unfold and tempers calm, we will be able to seek a price increase in France.

Erik Bloomquist – JP Morgan

Great. Then with respect to Indonesia, I understand that there’s been a fatwa issued to recommend no public place smoking for Muslim men. Is that something that we should take seriously in terms of having an impact on volumes or consumption within Indonesia, or is it more likely to be followed in the breach in your view?

Louie Camilleri

I wouldn’t worry about it too much. I think there have been mixed reports. This is not a new issue. All the Muslim teachings on smoking have been that it is discouraged, but it is not what’s called harem, i.e. not allowed. In Indonesia, it came out at the same time as banning yoga. So, I don’t think its being necessarily followed very seriously, and we haven’t seen any impact at all.

Erik Bloomquist – JP Morgan

Great. Last question it was just on the agreement with Swedish Match and what it means in terms of your harm reductions strategy going forward. Does this signal kind of a precedence for smokeless tobacco in terms of the harm reduction product and that focus on reduced harm or reduced risk cigarettes is something that will follow only once tobacco control people accept the validity of the smokeless claims?

Hermann Waldemer

No, I don’t think that should give you any sign of us slowing down on our other plans. This is all in parallel. It’s a basic strategy of harm reduction and the product elements of it include smokeless, but also include cigarettes, which will hopefully eliminate a lot of the harmful compounds. So, we’re working on both tracks and in fact spending quite a lot of resources on both tracks. So, it’s not one or the other, it's both at the same time.

Erik Bloomquist - JP Morgan

And sorry then, a quick follow-up; if you are continuing to spend in parallel, is that then a large chunk of that increase in the marketing and research spend that we saw this year; I mean the approximate $1 billion increase? Is that R&D work on reduced risk cigarettes a component of that?

Louie Camilleri

Yes.

Erik Bloomquist - JP Morgan

Very good. Thank you.

Operator

Your next question is from the line of Thilo Wrede with Credit Suisse

Thilo Wrede - Credit Suisse

Good afternoon gentlemen.

Louie Camilleri

Good afternoon.

Thilo Wrede - Credit Suisse

Just a quick follow-up on your commence about the volume outlook in the EU. I understand that volumes are down pretty much; it was a trend line on an adjusted basis. At the same time other tobacco products seem to be growing rather than declining. Is that an indication that maybe there is more down trading going on in the EU right now?

Louie Camilleri

I don’t think we’ve witnessed an acceleration in the down trading in EU and I suppose Marlboro’s performance is testament to that, because as the year unfolded, its performance got better. So, I would not say that there’s been an acceleration in down trading at all in the European Union.

Thilo Wrede - Credit Suisse

Okay. Then you mentioned brands like Next or Red & White is basically a safety net in case there would be down trading. Can you give us an idea what the average price gap would be between Marlboro and these brands?

Louie Camilleri

Varies by market quite dramatically, so it would be very dangerous for me to give you numbers. I mean, in France its 10%; in Russia it’s like 3% to 1%. Those are the two extremes, the rest is in between.

Thilo Wrede - Credit Suisse

Okay. Then you had some very interesting product introductions in 2008. Should we expect to see a similar range of new product introductions; be it filters, be it packaging, be it flavors like menthol, as we saw in 2008 for that to continue in 2009?

Louie Camilleri

Yes, I think as I mentioned in my remarks we have a number of exciting plans for 2009. A lot of it is geographic expansion of some of the products you already see in certain markets and others are new products. We’re very happy with our pipeline of new products and we’re going to deploy them across the world in a sort of diligent and deliberate manner.

Thilo Wrede - Credit Suisse

There are no slowdowns in spending on innovation despite the headwind from currency?

Louie Camilleri

No. I think it’s very important that we maintain our momentum and yes, currency is a dark cloud. But currency in my opinion is always a relatively short-term issue and my experience has been in times of difficulty, that is when you need to invest and push for growth and we’re in here for the long term. I’m very confident with the product portfolio we have. With the infrastructure we have we can gain share.

Thilo Wrede - Credit Suisse

Alright, thanks a lot.

Louie Camilleri

Thank you very much.

Operator

Your next question is from the line of Chris Growe with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

Hi, good afternoon Louie and Herman.

Louie Camilleri

Hi Chris.

Chris Growe - Stifel Nicolaus

I just had a few follow-up questions for you, if I could. The first, just as in relation to the Czech market, the distortions from that really occurred all throughout 2008 if I recall. Do we lap those starting in the first quarter?

Louie Camilleri

Yes.

Chris Growe - Stifel Nicolaus

Okay and then in terms of your expectations for 2009, would you have built in if you can just talk to this in general terms if anything, some mix degradation in your business on a concern that trade-down could occur? Can you talk about that net detail I should say for ‘09?

Louie Camilleri

Well we’ve clearly taken into account of the fact that the up-trading has slowed down, that’s something we clearly build into our numbers and beyond that I’m not sure want to till much more.

Chris Growe - Stifel Nicolaus

Understood, and then if I could ask, relative to your mid-tier performance, it looked like it was pretty solid in 2009. I know this can vary by market, but in terms of profits from mid-tier products versus say profits from Marlboro, are those vastly different or does it vary a lot by market?

Louie Camilleri

It varies dramatically by market, it really does, but no, we were very pleased with the performance of our medium priced brands. I mean if you take L&M and not many people know this, L&M is the number two brand in the European Union Region after Marlboro. It had strong growth in Germany, in Benelux, in France, as well as Poland, where it’s the number one brand. Chesterfield also grew very strongly across the world, but particularly in the EU, it grew very strongly in Italy and Spain and Portugal and in Switzerland. So there is quite a lot of growth coming from this mid-priced segment and it’s a lucrative segment.

Chris Growe - Stifel Nicolaus

Okay and then the last question I had for you is just in relation to consumption and I’m particularly keen on some of the emerging markets. Have you seen overall consumption of cigarettes slow, putting aside up-trading and that kind of thing for now?

Louie Camilleri

No, we haven’t really seen a shift. In fact, as I mentioned earlier, particularly because of Japan and the EU, we are projecting a better market environment than what we had in 2008, but we haven’t detected any reduction in consumption. We just got the January numbers and they’re smack on our plan.

Chris Growe - Stifel Nicolaus

Okay, great. I appreciate that insight. Thank you.

Louie Camilleri

I should add that probably the one area which is not major, but the one area we have seen some softness is Duty Free, but clearly we have seen a reduction in travel in a number of places and particularly in Asia and we have detected some softness in the numbers on Duty Free, but that’s really so far the only thing that seems to have been hurt by the current economic climate.

Chris Growe - Stifel Nicolaus

Okay, great. Thank you.

Louie Camilleri

Thank you.

Operator

Your next question is from the line of Jon Leinster with UBS.

Jon Leinster - UBS

Hi gentlemen. So, I have two questions from me. First of all, going back to the currency translation in respect of; clearly quite a lot of the raw materials are dollar or hard currency denominated, so are you building a sort of margin impact on this sort of devaluations we’ve seen in Turkey and Russia and elsewhere?

Louie Camilleri

Yes, it goes all the way to the bottom line, to the extent there are offsetting benefits for local currency costs, that’s in the guidance.

Jon Leinster - UBS

Yes, but effectively assuming they are for quite significantly lower margins for those operations, because of the currency impact.

Louie Camilleri

Absolutely.

Jon Leinster - UBS

Alright and secondly, in terms of the debt geographically, I don’t know what the debt has been swapped into, is there an obvious geographic profile to the debt?

Louie Camilleri

No, because we have done quite a lot of euro and Swiss Franc, the bulk has still been in dollars. I think going forward, you will probably see more euros. Some of these other currencies, the interest rates are prohibitive, so it doesn’t really make much sense to do so.

Jon Leinster - UBS

Alright and also in terms of the one sort of big obvious transactional thing going back to currencies is exports in Japan. As you believe that’s hedged, so there is no real benefit in ‘09 but going forward if the end stays where it is then is that a big benefit potentially or not?

Louie Camilleri

That is the one currency that is offsetting all the big negatives and yes, we have locked in that favorability as has been our case traditionally, but if I take the Yen ‘09 at current rates versus ‘08, that is an offsetting benefit to the $0.80 hit.

John Leinster - UBS

And then lastly, no mention of the Chinese joint venture is that progressing well?

Louie Camilleri

Yes, it continues to progress well. All the brands that we mentioned, RGD, Dubliss and Harmony, are performing as expected and they are now in six market. Harmony was the first premium brand which was launched in Argentina, I think in mid-November, in limited distribution and it’s performing up to expectations and we have a number of plans to roll out those brands in other markets as the year unfolds.

Importantly, Marlboro is doing quite well in China and as we’ve said this is a slow progress, but so far all the signs are green and things are moving. So we’re pleased with our cooperation with the CNTC and I believe they are pleased with our cooperation.

John Leinster - UBS

Thanks very much.

Louie Camilleri

Thank you.

Operator

Your next question is from the line of David Hayes with Nomura.

David Hayes - Nomura

Good evening gentlemen. Just going back to the guidance from $2.85 to $3 and just in terms if you obviously you’re going to fix FX assumption in that, you told us operating profit will be up organically 6% to 8%. I mean potentially that’s quite large guidance range that you have given. Is there some kind of volatility whisking the tax level or the interest cost that we should be aware of that drives that range and anything else that we should begin factoring in our numbers and then my second question is really about Camba, that was the first question?

Hermann Waldemer

Yes. No, tax will be slightly higher than it was in ‘08, I think it’s a like a $0.02 hit. There is no other real volatility. I think we’ve usually given guidance of the $0.10 range. We felt that prudence would dictate that given the world situation today, a $0.15 range was something that was more prudent.

As we said in our earnings release, we think we’ll be at the upper end of our long-term guidance and I think our long term guidance is 10 to 12. This guidance on a constant currency basis is 10 to 14 and that gives you a sense of we’re at up the upper end of our long-term guidance. I don’t know if that addresses your question.

David Hayes - Nomura

Yes, I guess. I mean I guess slightly to be offsetting if we do six at the operating profit level, here at the 2.85 range if you do with the higher end, eight or a little bit more, you are at the three and that’s proven to the statement, is that right?

Hermann Waldemer

Yes, that’s right and hopefully we’re a bit more than eight.

David Hayes - Nomura

Sure, thank you and then just another quick question. I mean other companies talked about distributors, retailers having to de-stock levels, because they are not able to get finance and then obviously some of these markets are direct, but have you seen the fourth quarter or at all anything happening there? Is that part of the volume declines that you see and you think that will then move out into next year or is that not impacting your business at all?

Hermann Waldemer

No, clearly we watched that and we watch our receivables and exposure like hawks. We haven’t detected any real movement. I would say that the only place we’ve detected some movement is in Japan, where the shift that I mentioned from vending to convenience stores has caused a return of quite a lot of product that was destined for vending. So that affected volumes in the fourth quarter, I think across the whole industry and those returns were higher than anticipated.

This card that’s used for the vending, I think it’s now up, it’s only around 32% of smokers have that card, which gives you a sense that it hasn’t been a roaring success and therefore that explains the returns of products in the fourth quarter.

Other than Japan, we haven’t seen anything and frankly I’m not surprised by it. Cigarettes are a fast moving consumer good. The margins for the retailers are excellent and they are bread and butter products for a lot of them. So, they tend to invest in that category because it’s both profitable, generates cash and moves rapidly.

David Hayes - Nomura

Sure. Okay, thank you very much.

Hermann Waldemer

Thank you.

Operator

And your final question is from the line of Ann Gurkin with Davenport.

Ann Gurkin - Davenport

Good afternoon.

Hermann Waldemer

Hi, Ann.

Ann Gurkin - Davenport

As you focus the business on faster decision making and more local market management, are you finding more opportunities to save money and if so are those potential savings in that 500 million or so number targeted this year?

Louie Camilleri

Yes, we continue to look as to ways of getting more effective. We haven’t really detected any huge things, but it’s a continual priority for us to become more effective and more efficient and I think over time we will do so, but that doesn’t impact the 500 million, if we can buy more, we will. As I said in my remarks we will do everything to mitigate this huge currency hit, obviously through pricing and cost, but not to jeopardize the long term growth and the momentum that we have and I think that’s in the best interest of our shareholders.

Ann Gurkin - Davenport

Great and then secondly if I may just follow-up on, Louie I think you said leaf costs are going to be $315 million this year, is that 425 number that you gave out in March of ‘08 still the right number or has that number gone up?

Louie Camilleri

No, it’s gone up. I think Hermann certainly in the third quarter and possibly even in the second has alerted investors to leave cost increases and therefore that 400 was probably going to increase by 100 to 200 and that 300 is part of that. The good news is, our sense is, as commodity prices have declined, there is more interest now in tobacco and the supply demand situation appears to be becoming much more balanced. So, I would hope that we would have the benefits in 2010 and 2011.

Ann Gurkin - Davenport

Then with respect to paper, do you anticipate adopting the LIP paper standard, perhaps in the EU market or Australia in the next 12 to 18 months?

Louie Camilleri

I’m not sure I understand your question.

Ann Gurkin - Davenport

The low emission propensity paper, do you all anticipate using that in your products in the next…?

Hermann Waldemer

Sorry. Yes, eventually I think there will be regulatory glucose from more and more of these lower emission propensity cigarettes and we are ready to do that when necessary.

Ann Gurkin - Davenport

That potential could be in 18 months or so do you think?

Louie Camilleri

In the number of markets, yes.

Ann Gurkin - Davenport

Okay great. That’s great thank you.

Louie Camilleri

Thank you very much Ann

Operator

This concludes the Q-and-A portion of our conference call. Now I will now turn the call back over to Mr. Rolly for any closing remarks.

Nick Rolly

Thanks you very much for joining us today. That concludes our conference call. I just wanted to announce that Philip Morris International will be presenting at the consumer analyst group of New York conference on Tuesday, February 17 at 3:00 pm Eastern Time and we will be webcasting that presentation. So, please check our website for more information. Thank you and have a good day.

Louie Camilleri

Thank you very much everybody.

Operator

Thank you for participating in today’s Philip Morris International’s 2008 fourth quarter and full year earnings conference call. You may now disconnect.

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