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Executives

Nick Rolli - VP, IR and Financial Communications

Hermann Waldemer - CFO

Analysts

Christine Farkas - Merrill Lynch

David Adelman - Morgan Stanley

Jon Leinster - UBS

Adam Spielman - Citigroup

Judy Hong - Goldman Sachs

Thilo Wrede - Credit Suisse

Jonathan Fell - Deutsche Bank

Christopher Growe - Stifel Nicolaus

Erik Bloomquist - JP Morgan

Ann Gurkin - Davenport

Philip Morris International, Inc. (PM) Q1 2009 Earnings Call April 23, 2009 9:00 AM ET

Operator

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

Nick Rolli

Welcome thank you for joining us. Earlier today we issued a news release containing detailed information on our 2009 first quarter results you may access the release on our website at www.pmintl.com.

As we take you through our call today, we will be talking about results in the first quarter of 2009 and comparing them with the same period in 2008 unless specified otherwise.

References to volumes are for PMI shipments, industry volume and share data is sourced from AC. Nielsen. Other third party sources and internal estimates net revenue data exclude excise taxes. You will find data tables showing how we made adjustments to revenues and operating company’s income or OCI for currency and acquisitions at the end of today's webcast slides which will be also posted to our website.

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

And now its my pleasure to introduce Hermann Waldemer, Chief Financial Officer, Hermann.

Hermann Waldemer

Hello, everyone. I am pleased to report that PMI's strong business momentum continued into 2009. In spite of the difficult economic environment net revenues in the first quarter grew by 3.9% excluding acquisitions and currency driven by price increases across a broad range of markets.

OCI increased by 6.2% excluding acquisitions and currency. This was driven by strong performances in the Eastern Europe, Middle East and Africa or EMEA. In Asia regions there net of currency we achieved double digit OCI growth in key markets of Russia, Ukraine, Australia, Indonesia and Korea.

A 2.3% decrease in EU region OCI net of acquisitions and currency resulted from a short contraction in industry volume in Poland. Due to large tax driven price increases lower shipment volume and the less favorable mix in Germany. Some minor market share erosion across the region, and higher marketing investments behind our new Marlboro initiatives.

Reported diluted earnings per share or EPS declined by $0.05 or 6.3% in the first quarter to $0.74, but there are $0.10 or 12.7% excluding the adverse currency impact.

Before I go into further details let me focus on the three topics which appear to be top of mind amongst our investors and journalists who follow us.

These are consumer trends in emerging markets pricing and currency. I can say today that we have not seen any broad based trends towards consumer down trading on a global basis. Let me illustrate the situation and how it varies from country to country. The four examples Russia, Ukraine, Indonesia and Argentina.

In Russia, we are seeing signs of consumer down trading driven by the impact of the collapse in oil and metal prices on the Russian economy. And the substantial cigarette price increases that have taken place over the last 12 months.

While shipments of super premium Parliament continued to increase in the first quarter. The volumes of premium Marlboro and mid priced Chesterfield were below last year's level. And sales of low price Bond Street increased significantly.

Overall PMI shipments in Russia were in line with last year. Our first quarter market share was up 0.3 points to 25.1% as measured by AC. Nielsen. It should be noted that we have now switched to this service provider in Russia due to its more extensive market coverage.

We have achieved double digit OCI growth in local currency through pricing and this has partially mitigated the negative currency impact on profitability in US dollars.

The impact of the global economic crisis on Ukraine has been worst than on Russia and this has been compounded by political uncertainty. Nevertheless our shipment volume in the first quarter rose by 0.7% and our market share for the period increased by 1.1 points to 35.8% driven by Parliament and Chesterfield.

In our efforts to boost revenues Ukrainian government has brought forward to this May excise tax increases planned over two years. This is expected to result in large retail price increases. Which in turn could lead to consumer down trading, however we believe that we will be able to maintain our leading position should any turmoil occur thanks to our excellent momentum and broad brand portfolio.

There has been no consumer down trading Indonesia where our volume in the first quarter increased by 2.8% broadly inline with the evolution in the total market. Consumer sentiment in Indonesia has been positively impacted reduction in inflation following significant price increases last year for cooking oil, gasoline and rice. And unemployment levels have remained stable.

The Indonesian economy has weathered the economic storm much better than most countries in Asia helped by its lower dependence on exports. The fastest growing segment in the Indonesian market is machine-made lighter tasting kreteks. This has helped us to grow the volume of A Mild by [12.5%] in the quarter.

While our [Alexandral] achieved some soup and some [Perner] brands have been negatively impacted by a difficult transition to higher price points.

In addition to a continued strong volume performance we have been able to boost ability in Indonesia by pricing both A Mild and Marlboro ahead of inflation.

The fourth country I would like to talk about is Argentina. Their up trading in the cigarette market has continued this is a country that has been frequently mentioned by economy commentators as being particularly vulnerable. This pessimism is not reflected in the performance of the cigarette so far this year.

During the first quarter consumer continued to trade up from the low end price segments to the mid price Philip Morris brand and premium Marlboro.

PMI's volume was up 1.2% in our three months moving average market share through the end of January reached 72.2% up 2.7 share points. In addition we were able to implement price increases in order to improve our profitability.

The outlook for the balance of the year remains positive the introduction of a minimum excise tax in February should help minimize tax driven down trading to lower price trends over the longer term.

As these four examples show we are not witnessing a global consumer down trading trend and the situation is quite different market-by-market. Some people have questioned our ability to continue to increase prices in the current economic environment. Our track record over the last six months shows that on the contrary we have retained our ability to increase prices in order to boost our profitability as shown on this slide. We have increased prices across a broad range of markets including Greece, Italy and Spain in the EU. Romania, Russia and Turkey in EMEA.

Australia, Indonesia and the Philippines in Asia and Argentina and Mexico in the Latin America and Canada region. Also you may have seen press reports that we have announced to the trade our intension to increase prices by 20 euro cents across our portfolio in Germany in June.

Our pricing variance in the first quarter was $358 million this is the largest pricing variance that we have ever achieved in the quarter. This highlights our ability to successfully implement price increases during a recession. In fact, our pricing variance this quarter was larger than our total annual pricing variance just three year's ago in 2006.

We webcasted our presentation at CAGNY provided investors and analysts through a better understanding of how currency impacts our business. As anticipated our first quarter results were severely impacted by the strength of the US dollar. Indeed currency adversely impacted net revenues, OCI and EPS by some $700 million, $400 million and $0.15, respectively.

As you are all aware in the recent weeks we have witnessed a slightly more favorable currency environment. In fact, should current spot rates prevail for the rest of the year, we would anticipate that our EPS would climb to the high end of our February guidance, while unit volume maybe somewhat softer than our earlier expectations. We are confident that this shortfall should occur will be more than offset by the benefit of pricing.

All in all, given continued currency volatility, we believe that it would be in prudent to raise our guidance at this early stage of the year. However, our solid start to the year certainly affirms our confidence in achieving our 2009 constant currency EPS, targeted growth of 10% to 14%.

Let me now comment on our first quarter results in a little more detail. Our cigarette shipment volume was stable at 203 billion units, but was 1.1% lower excluding acquisitions. However, on a per selling day basis, volume excluding acquisitions was stable in spite of significant price increases. This represents a solid achievement in light of our stronger results in the first quarter of 2008.

Our shipment volume in the EU was down 3.7%, driven primarily by the aforementioned contraction of industry volume in Poland and a slight market share erosion in Italy that was compounded by trade inventories distortions.

At 38.4%, our estimated market share in the EU region was down 0.3 points, due mainly to the sharing of low price low margin volume in Poland as well as the impact of a slight decline in the premium segment in Italy. It is important to underline that our market shares in France, Germany and Spain has stabilized.

In the EMEA region, volume was down 0.3%, but up 0.8% on a per selling day basis. This region includes our worldwide duty free business, which was down 10.5% due to the expected impact of reduced (inaudible). PMI volumes and market shares were strong notably in Algeria, Egypt and Turkey. And we also gained market share in Bulgaria, Croatia, Romania, Russia and Ukraine.

A very strong share performance in Korea, continued volume growth in Indonesia and the favorable distributor inventory movement in Japan related to the resourcing of production from the USA to Europe last year. Drove a 2.2% shipment volume increase in the Asia region. We have stabilized our market share in Japan at 23.9%, thanks to the strong performance Marlboro Black Menthol and Marlboro Filter Plus, and have just launched Lark Classics Milds nationally and Lark means fresh interest market

In Korea, PMI gained 2.8 share points and achieved a record share of 13.8% in the first quarter. Thanks to Marlboro, Parliament and Virginia Slims. In the Latin America and Canada region, reported volume was up 4.4%, boosted by our acquisition of Rothmans Inc. in Canada. Excluding acquisitions, shipments were down 4.7%, due to a targeted inventory reductions and weaker consumer demand in Columbia, the impact of December price increases on industry volume in the first quarter in Mexico.

Our share of the Mexican market increased by 2.3 share points to 69.2% behind the strong performance of Benson & Hedges and Delicados. Marlboro Fresh, contributed 0.5 share points to the 48.3 share of the Marlboro family.

On a brand basis, super-premium Parliament was a top performer, it was also 5.9%, in spite of the weakness of the duty free business and the continued market decline in Japan. Volumes grew strongly in Korea, Russia, Turkey and the Ukraine. After particularly strong performance in the fourth quarter of 2008, Marlboro shipment volume was down 2.4% to 71.1 billion units driven by lower industry volume and the 0.4 share point erosion in the EU region. We already mentioned decline in duty free sales and a softening in the premium segment in Russia.

We are not particularly perturbed by Marlboro's performance this quarter. As we continue to rollout our new brand architecture for Marlboro across many markets. We indeed remain very optimistic about the future of the trend.

The new Marlboro Gold packaging has been introduced in Austria, France, Germany, Italy and Poland after very position trial results. The slimmer diameter Marlboro Gold Edge is performing ahead of expectations in Russia and Ukraine and we are just launching Marlboro Gold Advance, a 10 milligram product under the gold umbrella nationally in France after excellent consumer feedback in this market.

Under the Marlboro Fresh umbrella, Marlboro Black Menthol continues to drive to return to growth of the Marlboro franchise in Japan. During the first quarter, Marlboro achieved a share of 10.4% in Japan, 0.5 points ahead of the same period last year. This Marlboro Black Menthol contributing a 1% share and enabling us to stabilize our overall share in the growing menthol segment at 44.9%.

Given the success of Marlboro Black Menthol in Japan, it was launched during the first quarter in Hong Kong and Indonesia. In the mid-price segment after achieving strong growth in 2008, Chesterfield's volume remains resilient. A strong performance in the EU where volume was up 5.5%, thanks to Austria, France and Portugal was partly offset by a decline in Russia.

L&M is globally showing a stronger performance than in 2008, this volume just down by 0.5% in the first quarter, in spite of continued double-digit decline in Russia and weakness of the Polish and duty free markets. L&M remains the fastest growing brand in Germany, and it's the second largest cigarette brand in the EU region after Marlboro.

Our key low price international brands, Bond Street, Next and Red & White achieved a combined volume of 15 billion units up 1.5% over the first quarter of last year. Overall, during the first quarter, PMI volume by price segment remained very stable, as premium representing 49% of cigarette volume, mid price 29%, and low price 22% in line of the previous year.

PMI's financial position remains very strong. Free cash flow defined as operating cash flow minus capital expenditures was $1.3 billion in line with last year as lower capital expenditures in the quarter offset the negative impact of currency and net earnings. And working capital requirements remained firmly under control.

Our balance sheet and liquidity position remains very strong and we continue to benefit from strong fixed income investor confidence. During the quarter, we successfully issued additional bonds for a total of 2 billion euros and 0.5 billion Swiss francs and now have a weighted average cost of long term debt of 5.6% We continue to implement our strategy to return cash to our shareholders we have declared our willingness to support our target dividend payout ratio of 65%.

And we spent $1.3 billion to repurchase 36.7 million shares during the first quarter. As we have said previously we do not expect the tobacco industry to be immune from the impact of the global economic crisis but to remain resilient.

This has been borne out during the first quarter. We have seen some softening on consumer trends in Russia and Ukraine but now global negative pattern. We have continued volume growth for example in Indonesia further trading up from the low and super-low price segments in Argentina.

We have also seen some reductions in trade inventories in certain markets as our partners seek to optimize cash flows. If unemployment continues to increase we may see a further softening of global consumer trends but think that should this occur it is likely to be moderate in nature.

We believe we have the strongest overall brand portfolio and the best geographic balance in the industry between mature and emerging markets. The efforts that we have made to refresh our innovation pipeline and to strengthen the Marlboro architecture are beginning to bear fruit.

As highlighted earlier we have increased prices across broad range of markets in order to partially mitigate the impact of unfavorable currency as well as any future potential volume or mixed softness. And most recently have announced the price increase in Germany.

The excise tax and regulatory environment continues to manageable. We are not aware of any potentially disruptive threats on the horizon in our key markets except as previously mentioned in Ukraine.

We continue to implement our productivity programs. And are on track to deliver substantial cost savings. In the short term we face some strong currency headwinds nevertheless our business continues to generate substantial cash flows which along with our very solid balance sheet provide us with excellent liquidity.

We remain committed to generous dividend level and foresee share repurchase in 2009 at a level similar to those undertaken in 2008. We remain focused on further strengthening our brands and our overall business and will therefore not take any measures to provide only short term gain.

We remain committed to our mid to long term currency neutral finance growth targets and strongly believe that we will be able to achieve them in 2009 in spite of the difficult economic environment.

I will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christine Farkas of Merrill Lynch.

Christine Farkas - Merrill Lynch

Thank you very much. Good morning Hermann.

Hermann Waldemer

Good morning, Christine.

Christine Farkas - Merrill Lynch

I am looking at the EU I respect your comments about no global trade down but looking at Marlboro share across France, Germany, Italy and of course Poland some share erosion as well as some sequential slow down in some key markets. Given the importance of the EU on your profits can you talk a little bit about what you are seeing sequentially and given the strong innovation portfolio behind Marlboro why perhaps Marlboro is not holding better than what we saw in the quarter?

Hermann Waldemer

Well first of all I would say that if you look at the shares for the EU region then you clearly can see that Marlboro is stabilizing let's not forget that Marlboro over the past couple of years was under pressure by price repositioning of premium brands to mid price brands that went to the low end. That is behind us we still have some slight share erosion in Germany. It is still down 0.6 France is down into quarter-on-quarter comparison but flat actually if you compare it to Q4 of 2008.

Spain down 0.5, Poland down 0.04, so these are much lower rates than what you have seen and actually when you go to the innovation pipeline. Well not just enter the beginning of rolling that out. You have the Marlboro relaunch, repackaging of Marlboro Gold its now in the markets in Germany, Austria, Poland, France, Italy.

So this is just starting Marlboro advanced had milligram product under the Gold umbrella the role out actually is only starting with France now later this month for the beginning of May. So many of the initiatives that we have done have just started there is much more to come. And this is what gives me the confidence that this is going to strengthen the Marlboro franchise going forward. When it comes to the total EU market then you have to see that there was one really very special item in there. Which was the trade or the retail inventory reduction in Spain which was driven by working capital requirements of tobacconist these are all small entrepreneurs. Which have brought their stocks little bit down but not to the point where we would risk any other stocks there, so that had an impact on the market and therefore on the volumes this quarter.

Christine Farkas - Merrill Lynch

Thanks for that Hermann. If I could follow up with just a couple of housekeeping items. Could you quantify the cost savings achieved in the quarter?

Hermann Waldemer

We are, we have delivered our $500 million actually last year we are fully on track to achieve $500 million again this year. We have leave cost increases in the quarter that was $40 million again that also something reflect earlier. So I have to tell you I can fully reassure that we will deliver the next $500 million in the year 2009.

Christine Farkas - Merrill Lynch

Okay great. And finally just on the chatter around multinational tax changes or potential changes in the US tax regime do you have any commentary about that and what you are potential impact or alternative may be there?

Hermann Waldemer

Yes I have, I mean the most important thing first of all is that any limitation of tax deferral would put US companies simply at competitive disadvantage versus that international. That is certainly not something that the US government wants. I would say that actually probably what the US government has in mind that all of those points do not apply to PMI. I mean first I think the government probably wants to avoid foreign profits or part approach forever.

I mean our case is that three quarters of our earnings abroad are actually repatriated to the US every year, in order to satisfy dividends and other US dollar requirements the second thing is that this is of course a fight against the abuse of tax havens. We are not using or abusing any of those tax havens. And the third one is probably that the government wants to avoid profit shifting via inter-company pricing abroad. I can tell you that we have conservative inter-company pricing policy around the world consistent policies, and actually we secure those policies where feasible with advance pricing agreements with the respective fiscal authorities of those countries.

So in terms of looking forward to see what will happen we did some if you like simulation what the Wrangler proposal actually would mean to us that this is idea of combining some restrictions of deferral and restrictions on possible deductions with rate reduction while that impact would be less than 1% on our tax rate.

So we will see what's going to come but you can see we are clearly not the target that the US government is having in mind.

Christine Farkas - Merrill Lynch

Great thanks for that Hermann.

Hermann Waldemer

Welcome.

Operator

Your next question comes from the line of David Adelman of Morgan Stanley.

David Adelman - Morgan Stanley

Good morning Hermann.

Hermann Waldemer

Good morning, David.

David Adelman - Morgan Stanley

First I have a question about market share I think its fair to say that your overall share trends improves throughout 2008 particularly in the fourth quarter and it appears not just in EU. But broadly that is going to have momentum has moderated in the first quarter, do you think that’s a fair observation and if it is true what’s happening, is it a reflection of the economy, your premium price positioning, the price increases you have taken and so on.

Hermann Waldemer

While we have been talking about the UB4, let's go to the other regions, I do not agree this statement, let's go one-by-one. You go to the Asia region, there actually we have stabilized our share in Japan, very important market at 23.9%. We are growing tremendously in Korea, we are growing 2.3% in the Singapore, 48 region share in terms of in-market sales is also up 0.3% to 19.8%. So, that’s not valid I would say for the Asia region. If I then go over to the EMEA region, then you look at Neilson shares while our shares both in Russia and in Ukraine and actually in Turkey and other important market are up quite a bit. So, now I don't see any general trends that are always specific market situation on a market-by-market basis.

David Adelman - Morgan Stanley

Okay. Secondly, Hermann is illicit trade becoming anymore of an issue with the weakening economies?

Hermann Waldemer

No. We don't see that, I mean elicit trade I would say in general is rather triggered by large price differentials between neighboring countries. No, we don't see an increase there. It remains a problems, but it's not increasing it's not much decreasing either. I mean our EU agreement there is very successful, we have seen that the UK actually joined now. The EU agreements just a couple of days or a week ago. Now all 25 member stage are now part of that agreement.

David Adelman - Morgan Stanley

Okay. And then two aspects Hermann, with respect to share repurchases what's the argument given where the stock is valued, where it traded in the first quarter. What’s the argument against either accelerating the programs which or just front-end loading it a bit given the current stock price.

Hermann Waldemer

It's again is what we are speculating if you like at the end of today. We have been pretty heavy in the market in the first quarter I would say, 1.3 billion is US $1.3 million that’s a sizeable amount of money I would say. We will continue to do what we did that in principle and in general we will go now on a steady pace.

David Adelman - Morgan Stanley

Okay. And then lastly Hermann, in Brazil I know it's not a big profit center for you, but being BAT led a price increase in that market I think a few weeks ago. Have you followed them as of yet?

Hermann Waldemer

We are filing our price list today, that price list contains substantial price increases across the Board of our portfolio. That being said it's a bit unfortunate that this heavy excise increase driven change was not accompanied by reform of the excise tax system, which in my opinion is over due in Brazil.

David Adelman - Morgan Stanley

Okay. Thank you. Hermann, I appreciate it.

Operator

Your next question comes from the line of Jon Leinster of UBS.

Jon Leinster - UBS

Again just a couple of things, in Germany taken a price increase first time though for a number of year's, given that down trading continues and then there still seems to be a problem with elicit trade. Is that simply reflect that perhaps you have accepted ongoing down trading within Germany or is that something that can still be stopped.

Hermann Waldemer

Well look, the Germany market is not an easy market has never been an easy market, but I think in terms of performance, we have seen substantial improvement in Germany. We have a great team there that has done a great job. Our share performance for cigarettes is stable now at 35.8%. So, we have restabilized Marlboro in that market is slightly down. The new gold a new pack design is going out there. At the same time we have established L&M at the low price which has you know is not that much of a difference in price than in other markets, just on $0.40 we have established L&M there, it is the fastest going major brand in the markets, it is now at 7.6% share, it's having an 24 share of 15%.

So, I think overall we are doing fine in the market, it's just that the market environment in that sense has changed at what you were used to say 3-4-5 year's ago, that we were talking about the image contenders between Marlboro, Lucky Strike and [Angola's Blonde]. And today we talk about those free to giver eventually versus at the low end the [JPSS, the Parmars] and most importantly our L&M.

Jon Leinster - UBS

Alright. And on the Ukraine, you mentioned a big tax increases coming through in May, are you there expecting, is the slight increase in volumes now and trade, is that just going to be [NOCS or trade launch] trade load in the second quarter. Is that something that’s [illegal] in the Ukraine.

Hermann Waldemer

No, it's not going to be a much of a loading question there in the Ukraine, I mean the thing in the Ukraine simply is and that’s why we issued the word of caution there on that market is that advice overall prices or still I would say nevertheless in the affordable area. Nevertheless, we have seen a serious of excise driven price increases in a very short timeframe. We had one in September of '08, we had another one in January and now you will have another one in May. So, the speed of those price adaptations is what makes it difficult in an overall really difficult economic environment for that country. So, that I think is the crucial point in the Ukraine.

Jon Leinster - UBS

Alright. And can I just lastly, the industry signed an agreement trying that the Canadian government crack down on the elicit trade there. There seems to be a bit of a slowdown in the decline of market. I mean is the enforcement agencies actually looking at the sales of cigarettes coming up the reservations or is that still an issue to be?

Hermann Waldemer

There is still an issue and we don't see much improvement there yet. The one notable improvement I do see, however, is that the problem gets much more media attention and usually governments attention follows media attention. So that’s a good development, because at the certain point in time, this will need more enforcement and therefore, more government intervention into that topic. But we talk about 30% of consumption which is coming out illegally out of these reservations.

Jon Leinster - UBS

Okay. Well thank you.

Hermann Waldemer

You are welcome.

Operator

Your next question comes from the line of Adam Spielman of Citigroup.

Adam Spielman - Citigroup

Hello, good morning. A question on the balance if I may between pricing and share. You said that if I understand you right, you are extremely confident that your constant currency earnings guidance for the year will be met even if volumes are perhaps not weaker than expected. And it's necessary that you will increase pricing and clearly you already had a huge increase in pricing as you said on the pricing variance.

But at the same time I am interested in how you squared that, where the market share loss in the EU and they are beginning to see some signs of down trading in Russia which I guess is your most important emerging market.

I always understood that you wanted to balance profit growth and share growth. And I was wondering just in these rather difficult year where business slight changing emphasis compared with what you had been a few year's ago?

Hermann Waldemer

Look, I can only talk about past pricing here, you will see what we have done. This is not a question that you answer for the word is not a question that you can answer for. A region this clearly an answer on a per market basis. We tried to find the right balance there, that’s what we have done in the past, that’s what we do now, that’s what we want to do going forward. It is a balance overall on a market-by-market basis.

Adam Spielman - Citigroup

And I guess I infer from that, even some markets you loose a bit of share but you basically improved profit by taking pricing as you have to than you are comfortable with that.

Hermann Waldemer

We made conscious decisions on a market by market basis yes.

Adam Spielman - Citigroup

Thanks very much.

Operator

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

Judy Hong - Goldman Sachs

Thanks, hi Hermann.

Hermann Waldemer

Hi, Judy.

Judy Hong - Goldman Sachs

One question on Russia here. As you see signs of some down trading in that market can you talk about what's happening with price gaps between premium and low price. And as down trading is happening do you sense any reluctance on the part of your competitors to follow price increases or is this industry still pretty rationale in terms of the pricing?

Hermann Waldemer

Look I mean in terms of price gaps in the Russian market they have not increased substantially I mean some times at the low end it’s a little bit less in absolute terms in terms of our price increases than at the high end I mean the gaps are Russia are wide in any case. So therefore question of down trading is not driven price gaps in that market I am speaking Russia here. It is really rather the rather the environment overall and then when you looked at our in market sales data.

And you see that actually Parliament which is super premium continues to grow then Marlboro being premium Chesterfield being at the high end of the mid price being in somewhat declining. And then you see sharp increases at the low end in other case Bond Street being up 27% almost. Its clear what's happening there and its clear how the different segment of population are doing so this is very much driven by that.

Let me add there that actually Parliament in our case in Russia is a bigger brand than Marlboro and actually the margin we derived from Parliament in Russia are about 50% higher than the ones from Marlboro.

Judy Hong - Goldman Sachs

Okay and then in Latin America and Canada region Hermann you saw pass it down about 9% if you take our currency and as actually pricing seemed pretty favorable there so I am just wondering what happened just from a profitability perspective in that region?

Hermann Waldemer

Okay. Of course minus 9% I believe it will sound terrible but that actually means in absolute terms $14 million. So we have to put in to the context there this is actually driven really by trade inventory adjustments, Columbia is an ancient also little bit into Dominican Republic. Then in terms of comparison to the year before you had an excise windfall profit in Ecuador which you don’t have this year. So its kind of unfavorable comparison there and in terms of absolute money we do not talk about this stuff.

I mean let me put it this way there is nothing fundamentally wrong in the business model to contrary we are doing we had price increases as it said in both Mexico and Argentina. We are growing share in our most important markets of Mexico up 2.2% to 69.2, Argentina 72.2 I mentioned.

Brazil is also up and important Canada is up also on share point performer if you (inaudible) my be we are not yet 100% owner of the company so there is nothing fundamentally wrong in the Latin America region.

Judy Hong - Goldman Sachs

Okay and then finally on currency Hermann. If I look at your first quarter it looks like currency was about $0.15 of a negative impact I think your guidance still implies about $0.80 hit for the full year. And I know you have alluded to some favorability that was seen more recently. But if you sort of annualize the $0.15 you get $0.60 and then fourth quarter I had imagine year-over-year comparisons are actually more favorable versus kind of the first three quarters of the year. So it actually seems like there is even bigger print upsize than kind of the EPS coming in at the high end of your guidance at rates. And am I not reading this correctly?

Hermann Waldemer

We are doing here also kind of regularly our currency sensitivities where we think we are going to come out its actually the volatility in the which is the key argument and we have this instance of impact when we the guidance at spot rates then beginning of February than actually if you were, the simulation at quarter close i.e. at the end of March. $0.80 would $0.75 then if I would do it we did do it again on Monday this week than it was $0.70.

And if I do it yesterday it is $0.73 you see the volatility up and down in there. So given that volatility we simply see no basis to change our guidance based on currency at this point in time let's talk again once we have three more months of actual after end of quarter two.

Judy Hong - Goldman Sachs

Okay thank you.

Hermann Waldemer

Welcome.

Operator

Your next question comes from the line of Thilo Wrede of Credit Suisse.

Thilo Wrede - Credit Suisse

Hi Hermann.

Hermann Waldemer

Hi Thilo.

Thilo Wrede - Credit Suisse

Do the four markets of Russia, Ukraine, Mexico and Turkey still account for about 75% of the negative currency effect this year?

Hermann Waldemer

Roughly, yes.

Thilo Wrede - Credit Suisse

Okay, and then you talked about Spain and the one-off inventory expansion that you saw did your working capital requirements for the wholesalers. What gives you the confidence that this is only a one quarter phenomenon, why could not this strike out into second and third quarter as well? And how much do the price increases in Spain have to do with the volume there?

Hermann Waldemer

I do not think its price increases it is, at a level but I think that they are at least close to the levels that they really need I mean I would imagine that quite a number of retailers given the difficult situation our country is in and they are in terms of working capital that they had a close look at the inventories again what they really need. And that’s what they have adjusted to I mean if I just give you comparison you have 10% down as I mentioned.

But if you take the last four week moving average than its simply down 3.1% so I think that has already come down I think it was an adjustment and it should not repeat itself.

Thilo Wrede - Credit Suisse

Okay. Then the down trading that you are now seeing in Russia you said it was driven by the state of the economy and commodity prices what has to happen for the down trading to turn this up trading against entirely the oil price and other commodity price?

Hermann Waldemer

Well the oil price as the commodity prices have, certainly and had a big impact on the currency rate of the rubel for the consumer I think we told about consumer confidence to start and I would say leading indicator be it Russia or be it elsewhere is unemployment rates. Steeply rising unemployment rates are always warning signal and improving rates are a good signal. I think that’s what I would look at.

Thilo Wrede - Credit Suisse

Okay and then just one last question on Poland real quick how much is illicit trade driven by the tax summarization there in Poland from that is contributing to the volume decline there?

Hermann Waldemer

Okay its right there of course now Polish practice are relatively high therefore there is now in flow into Poland. Whereas we were all used to in flow from Poland to Germany. So I mean the thing really is that the key to suggestion in Poland is however not it plays a role that you are right it plays a role but the key there is simply that driven by EU session and therefore compliance with the EU excise requirements we had a series of really steep excise driven price increases in the market.

I mean look today Marlboro prices after the stock depletion we had already announced almost [9 slotis] for a pack of Marlboro that’s quite a price. And whole portfolio in the market has become much expensive than what it used to be smoking incidence which used to be in the range of 40% or even slightly above if Poland is coming down to lost measurement data we have about 33% in the market. That’s a steep decline on the other hand this around the normal rate for a Western European country. So its rather there than in cross border sales.

Thilo Wrede - Credit Suisse

All right, thanks a lot Hermann.

Hermann Waldemer

You are welcome.

Operator

Your next question comes from the line of John Fell of Deutsche Bank.

Jonathan Fell - Deutsche Bank

I have couple of things first of all on Germany. How optimistic are you at the price increase you announced it is going to be something that generates a longer term price increase or is it something that will just be in there for. How many before the number of sticks per pack ends up?

And then the second thing was on just on this general situation at distributors and destocking are there any other markets around the world where you think there might be abilities to that going on that we have not seen yet. That you are concerned about?

Hermann Waldemer

Okay I mean the first question on Germany I am commenting on future pricing but I fully enjoy the existing price increase that we have announced than on the minimum pack content yes that law is in the parliamentary process I see no reason why that piece of legislation should fail. So they changed to the new minimum pack content of 19s can eventually be in August.

In terms of stock reductions at trade levels I mean we have in the general terms we probably have seen that already, I mean Spain was of a magnitude that I do not see repeated elsewhere on the other hand we took review of this in the trade try to manage pretty tightly those stocks. So I can not exclude some adjustments in addition in other markets driven by the financial situation but only by that but it would not lead to a situation where that would have impact on the competitive position I can not see situation where that would trigger out of stocks than we have the necessary trade programs in place in August to make sure that there is always enough stock available.

Jonathan Fell - Deutsche Bank

And then just lastly on Japan where you benefited a little bit in shipment terms because of this production there from the US and Europe is that going to unwind in the next quarter or coming quarters or is that sort of one-off adjustments that we will not see again?

Hermann Waldemer

It is rather a one-off adjustment upward driven by that resourcing but that adjustment has been made there won’t be more of that.

Jonathan Fell - Deutsche Bank

Okay will it unwind.

Hermann Waldemer

No

Jonathan Fell - Deutsche Bank

Okay thanks a lot.

Hermann Waldemer

Welcome.

Operator

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

Christopher Growe - Stifel Nicolaus

Hi good morning Hermann

Hermann Waldemer

Good morning Chris.

Christopher Growe - Stifel Nicolaus

Hi If I could just follow-up on that question quickly on Japan you gave some information in the press release how excluding that one-time adjustment I believe your shipments in Japan were still up 0.8% is that correct? I thought of this, you said that market, 5.5% but I think you said your shipments were still up even excluding the inventory movement?

Hermann Waldemer

Right look I mean in overall I mean maybe a couple really on the situation in Japan I mean the underlying market decline in that market because the minus 5.5% down on the market is of course influenced caused by selling days. I think the underlying market decline is rather in the range of 4% there really, have stabilized our share performance in the markets that’s very, very important Marlboro is up that was higher priority and in terms of market competitiveness, we have achieved that and we have a double that share in young adult share. So I think we have been doing pretty well there, congratulations to the team down there.

Christopher Growe - Stifel Nicolaus

Okay and then I wonder if you would give like a overall measure of your product mix in the quarter would that have that been positive in the quarter I know you had a little challenge of course at Marlboro being down in volume. But was your overall product mix, given measure that you could share with us?

Hermann Waldemer

Well, in terms of our volumes I mean we have that chart in presentation there premium mid and low, that actually percentage of rates has not changed versus last year.

Christopher Growe - Stifel Nicolaus

Okay right best we look at it yes sure. And then I guess maybe you perhaps have answered this question before but I was surprised by the degree of the OCI increase in Russia given what it is to Marlboro but perhaps Parliament was that much shorter that it overcame would that be the main factor even though you had big growth in the low-end?

Hermann Waldemer

Yeah look in Russia first of all we have gained market share. We have kept our volume stable. We had very nice increases on Parliament and of course overall we had substantial price increases in the market so it’s the combination of those elements.

Christopher Growe - Stifel Nicolaus

Sure okay and then just one last question and you have mentioned you know how volumes could be tight, unemployment that’s no secret, I guess my question would be that as much as you have been very strong and diligent about taking pricing. And seem that you are really focusing our profitability as you look ahead other markets have you seen this I guess to-date where you are having to get little more promotional because of whether it’s down trading or just weakness in volumes fortunately it should be a little bit more volume sensitive and maybe you would like to be.

Hermann Waldemer

You mean in terms of us making promotional price offers or --

Christopher Growe - Stifel Nicolaus

Yes correct you promoting more heavily to try and may be stabilize volume or to slow some down trading are there any markets where you had a move on that to this point?

Hermann Waldemer

First of all it plays a much lesser role in the international markets than it does play in the US. So we have to do it at a much less extent and actually our target would rather be to bring as a general also bring it down than up. So there might be here and there in the market and we need do it for tactical reasons at a certain point in time. But is there a general trend to that then the answer is clearly no.

Christopher Growe - Stifel Nicolaus

Okay that’s very helpful. Thank you.

Hermann Waldemer

You are welcome.

Operator

Your next question comes from the line of Erik Bloomquist of JP Morgan

Erik Bloomquist - JP Morgan

Hey good morning, Hermann.

Hermann Waldemer

Hi, Erik.

Erik Bloomquist - JP Morgan

Just wanted to follow-up down little bit more in terms of the Polish situation, given that the, the excise tax increases has now been put in place and are unlikely to increase further, it certainly thinks that we could gradually see some recovery in Polish volume overtime given that the, unless a trade does not appear to be massively increasing?

Hermann Waldemer

Look, I mean if the situation in Poland I have described at present we are managing through a very difficult environment. If all those tax driven, price driven consumption declines in the market, some down trading to OTPs. So the economic downturns, so that is a difficult period that we have to mange through on the other hand now and after the end of this transition period by the end of June. The consumer will see the new prices finally.

So there will be another price increase for the consumer if you like by that time. That being said, going forward in the Polish market I see really substantially improved parameters, I mean the excise tax is now in place and the system is being reformed at a lower end and went down specifically rent up there is an effective MET in place forced on in the regulation is in place. So these crazy situations we have seen before should not repeat itself, as no new excise tax increase on the horizon.

So I think overall that’s going to be okay and therefore, going forward I would say that our performance in the markets is also bound to improve. Once that has all shaken out and once we come back to a normal marketing and sales competition in the market.

Erik Bloomquist - JP Morgan

Okay, thank you. And then just going back to the Russian situation, could you give us some more precise information on the degree to which pricing has come up in the Russian market and perhaps into the segment say from December?

Hermann Waldemer

Okay, look I mean essentially if you look at the two recent price moves that we did in that was December, January where we went up at the high end by total, one and the half end then the low end and then the next one in April where we went to roughly two rules at the high end and one little bit at the low end.

Erik Bloomquist - JP Morgan

Okay, thank you.

Hermann Waldemer

Welcome.

Operator

We have time for one more question. So our final question comes from the line of Ann Gurkin of Davenport.

Ann Gurkin - Davenport

Hello.

Hermann Waldemer

Hello.

Ann Gurkin - Davenport

I am going to ask about the tax raise in the UK amounts, increase in the UK on both tobacco and alcohol and is this inline and in your forecast and should we be concerned but when we will see drop ends looking given price are going up?

Hermann Waldemer

Well, I personally don’t think so because look at the overall price levels in the UK already today.

Ann Gurkin - Davenport

Its excellent, secondly you highlighted the higher, tobacco leaf cost in the first quarter, what is your expectations for a leaf cost in the second half versus the second half of last year?

Hermann Waldemer

Okay, look essentially what happened on leaf is really that we had to buy already lost here, I mean the price increases in terms of cash flow came last year. So we both of those higher prices and the there was cash impact last year of $480 million and now this of course washes into the income statement as you used leaf.

So this crop is actually going to be a less larger crop as we expect the situation already to normalize this year. But what you have on stock you have on stock. So I would say its something between $250 million and $300 million for our P&L this year however that amount is of course included in our guidance.

Ann Gurkin - Davenport

That’s right, thank you everyone.

Hermann Waldemer

Welcome.

Operator

Thank you, I will now turn the call over to Hermann Waldemer for final remarks.

Hermann Waldemer

Okay, well thank you very much for joining us on the conference call, the investors relations group is available in Lausanne on for follow up calls. The numbers are on our press release I would also like to remind you that our annual shareholders meeting will take place on May 5th, in New York and the our proxy and annual report can be found on our website. Again thank you very much and have a good day.

Operator

Thank you, that does conclude today’s Philip Morris International first quarter 2009 earnings conference call. You may now disconnect.

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Source: Philip Morris International, Inc., Q1 2009 Earnings Call Transcript
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