Executives
Nick Rolli - VP of IR and Financial Communications
Dinny Devitre - SVP and CFO
Analysts
David Adelman - Morgan Stanley
Judy Hong - Goldman Sachs
Erik Bloomquist - JP Morgan
Filippe Goossens - Credit Suisse
Bonnie Herzog - Citigroup
Ann Gurkin - Davenport
Christine Farkas - Merrill Lynch
Chris Growe - A.G. Edwards
Erik Bloomquist - JP Morgan
Chris Burritt - Bloomberg News
Altria Group Inc. (MO) Q3 2007 Earnings Call October 17, 2007 9:00 AM ET
Operator
Good day. Welcome to Altria Group's Third Quarter 2007 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria management and the question-and-answer session.
(Operators Instructions). Media representatives on the call will also be able to ask questions, following the conclusion of questions from the investment community.
I'll now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications for Altria. Please go ahead, sir.
Nick Rolli
Good morning and thank you for joining us on the call today. For those of you listening via the audio webcast, we are providing summary slides of the third quarter results. Today's call is limited to a discussion of our business results.
Our remarks today contain forward-looking statements and projections of future results, and I direct your attention to the Safe Harbor Statement at the end of our news release, for a review of the various factors that could cause actual results to differ materially from projections. For detailed review of our third quarter results, I direct your attention to the news release we issued earlier this morning, which is available on our "Investor Relations" section at www.altria.com.
And now it's my pleasure to introduce Dinny Devitre, Altria's Senior Vice President and Chief Financial Officer. Dinny?
Dinny Devitre
Thanks Nick. Good morning. As you know, in August we announced our intention to pursue the spin-off of Philip Morris International. The Board anticipates that it will be in a position to finalize its decision and announce the precise timing of the spin-off for its regularly scheduled meeting on January 30th, 2008.
In September, PMI filed with the SEC, a preliminary registration statement on Form 10 in preparation for its potential spin-off from Altria, and you can access the document at www.sec.gov.
In addition, Altria submitted a private letter ruling a request to the IRS.
Now we turn to earnings. Altria generated strong third quarter results with robust income growth driven by US and international tobacco. Diluted earnings per share from continuing operations were up $0.19 or 18.1% to $1.24, including favorable tax items of $0.05 per share, charges of $0.02 per share for asset impairment and exit costs, as well as other items detailed on Schedule 7 versus $1.05 per share in the year ago quarter.
Adjusted diluted earnings per share from continuing operations were up $13.1 to $1.21, versus $1.07 in 2006.
For the full year, 2007 earnings per share guidance was raised $0.15 to a range of $4.20 to $4.25 versus a previous projection of $4.05 to $4.10. This reflects $0.08 per share due to a lower tax rate, favorable currency of $0.04 per share and higher income at PMI of $0.03 per share.
Turning to our domestic and international tobacco company results. I'll start with Philip Morris USA. In the third quarter, PM USA's operating company's income increased 2% to $1.3 billion, driven by lower wholesale promotional allowance rates and lower selling general and administrative costs.
Those items were partially offset by increased resolution expenses, lower volumes, investments in support of PM USA's adjacency strategy, and a $22 million pre-tax charge related to the previously announced closure of the Cabarrus facility.
Absent of that pre-tax charge, PM USA's operating company's income would have increased by 3.7%. PM USA's shipment volume of 47.1 billion units was down 1% or 500 million units versus the prior year. However, PM USA estimates that shipments were down approximately 3% when adjusted for changes in trade inventories and calendar differences.
During the quarter, Philip Morris USA estimates that total cigarette industry volume declined between 3% and 4%, and for the full year of 2007, PM USA is maintaining its prior estimate of a 3% to 4% decline in total industry volume. PM USA achieved a record retail market share of 50.6%, up 0.2 points. This was driven primarily by Marlboro, which increased its retail share by 0.5 points to a record 41.1%. Both Philip Morris USA and Marlboro achieved sequential share growth for three consecutive quarters. Retail share for Parliament was up 0.1 point to 1.9%.
As part of its adjacency growth strategy to develop new revenue and income sources for the future, Philip Morris USA initiated a test of Marlboro Snus in the Dallas/Fort Worth, Texas area, beginning in August 2007. They also announced a test market for Marlboro Moist Smokeless Tobacco in Atlanta, and Georgia and began shipping products to wholesalers this week.
In the third quarter, Philip Morris USA began shipping a number of new products, including Marlboro Smooth 100's Box, and Marlboro Virginia Blend King Box and 100's Box. For 2007, Philip Morris USA forecasts moderate growth in retail share and operating companies' income growth of approximately 2%, excluding the manufacturing consolidation charge related to closing the Cabarrus facility.
Turning to our International Tobacco business, PMI achieved income growth in all its reportable segments in the third quarter. Operating companies’ income increased 18.8% to $2.5 billion, due primarily to higher pricing, favorable currency of $138 million, productivity and cost savings. Excluding the impact of asset impairments and exit costs, acquisitions and currency, and operating companies' income grew a strong 10.2%. PMI's figured shipment volume increased 0.6% to 217 billion units, due to acquisition volume from Lakson Tobacco in Pakistan.
Excluding the impact of the Pakistan acquisition, cigarette shipment volume declined 1.9% or 4 billion units. The shipment decline was primarily due to Germany, the Czech Republic and Poland, and partially offset by gains in Algeria, Argentina, Bulgaria, Egypt, Korea, Lebanon, Slovak Republic, Spain and Ukraine. Since the earnings release presents a detailed overview of PMI's business in it's various segments, I shall contain my remarks to a few specific subjects and markets.
Industry volume in the European Union, based on in-market sales as opposed to shipment data at a 167 billion units, was down 3.8% compared to the same period last year. The decline was due largely to the impact of tax-driven price increases, particularly in Germany, Poland and the Czech Republic.
PMI's in-market sales in the EU at 65 billion units, were down 5.3% and market share declined 0.6 points to 39.1% in the third quarter. However, in the nine months ending September, PMI share was 39.4%, demonstrating that its premium portfolio remains resilient in the phase of significant consumer down-trading to low price brands in certain markets. PMI expects to hold share at this level in EU for 2007.
In addition, PMI's profitability in the EU improved significantly in the third quarter over last year, with operating companies' income up 21% in the third quarter and excluding currency up a very solid 5%.
In Germany, the cigarette industry declined 5.7% in the third quarter, reflecting the impact of higher pricing. PMI's market share was down 1.3 points to 35.2%. It was driven down by consumer down-trading to the low price segment and an increase in key a competitor's trade inventory. Adjusting for the trade inventory increase, PMI estimates that its marker share was down 0.8 points in the third quarter.
In Poland, significant tax-driven price increases resulted in a total industry decline of 10.5% and a market share decline for our business of 2.6 points, to 38%. The decline was due primarily to volume losses for PMI's low price brands and local 70 millimeter brands. However, PMI is increasing its focus on higher margin brands and its profitability in Poland nearly tripled.
In the Czech Republic, the industry was down 9% in the third quarter due to the timing of trade purchases. However, in the nine months ending September it was up 1.6%. PMI's share of market declined 8.5 points to 49.3% due to a temporary price disadvantage of PMI's brands, as a result of shorter inventory durations and earlier tax driven price increases versus its competitors. PMI expects to recover a large part of this loss in the fourth quarter and is forecasting its full year share in the Czech Republic to be about 50%.
During the third quarter, PMI's business performed well in Italy, Spain and France, and profits were up in all three markets. Market share in Italy rose, and was driven by Chesterfield, Philip Morris and Merit and in Spain was driven by the growth of Chesterfield and L&M.
In France, market share was down 0.5 points due to higher pricing, but profit growth was solid. The most recent volume trends for Marlboro in France are encouraging, despite the price increase.
In EEMA, shipment volume was up slightly in the third quarter as higher volumes in Algeria, Bulgaria, Egypt, Lebanon and Ukraine more than offset declines in Serbia duty free, and the unfavorable timing of shipment in Kuwait. OCI and EEMA was up 22% to $710 million.
In Egypt, the continued growth of L&M fueled a 21% shipment increase, and a market share gain of 2.6 points. In Ukraine, consumer upgrading to Marlboro, Parliament and Chesterfield resulted in a shipment increase of 3.5% and a market share gain of 0.6 points to 34%. In Russia, market share rose 0.4 points to 26.6% as our premium brands Marlboro, Parliament, Virginia Slims and Chesterfield continued to grow strongly, more than offsetting the decline of L&M.
Last month, PMI replaced the entire L&M brand family with a completely new offering to improve its vibrancy in adult consumer appeal. The new L&M is receiving a good trial response and volume performance to-date is encouraging. Looking ahead, PMI's in-market shares in Russia are expected to return to growth in the fourth quarter as L&Ms declined moderate and gains accelerate across the rest of our portfolio, especially for our higher priced brands.
This growth will be driven, in part, by recent new launches including Virginia Slims Uno, an innovative perform-pack promoted in upscale venues, and Marlboro Filter Plus, which was launched in May at a significant price premium to regular Marlboro. Improved brand mix and better prices are generating strong income gains in Russia.
In Asia, PMI shipment volume was affected by declines in Indonesia, Japan, Malaysia and Thailand. However, operating company's income in the third quarter grew 14.5% in Asia to $514 million. In Japan, the industry was up, due to favorable comparison with the third quarter of 2006, as last year's total market was depressed by trade inventory depletions following the July 2006 tax-driven price increase. PMI shipments in Japan were flat, while market share 24.3% was down 0.6 points. Marlboro share was stable at 10.1%.
For the fourth quarter, PMI estimates that its in-markets sales in Japan will be down about 4% and market share will be slightly lower than the fourth quarter of 2006.
In Indonesia, although PMI shipments and market share were temporarily impacted by a stick price disadvantage versus its low price competition, profits rose significantly. Marlboro share grew 0.5 points to 4.3% driven by improved marketing and distribution and the July 2007 launch of Marlboro kretek.
In Latin America, PMI shipments were down 1.5%, as declines in Brazil and Colombia were partially offset by continued growth in Argentina. However, income was up 7.5% driven by higher pricing. Market share grew an impressive 2.2 points in Argentina to a record 69.7%, due to Marlboro and the continued growth of the Philip Morris brand.
In Mexico, PMI's market share also reached a record 65.5%, up 1.6 points on the strength of Marlboro, Benson & Hedges and Delicados.
For 2007, PMI's volume is forecast to grow between 2% and 3%, including all Lakson volume in Pakistan. Absent Pakistan, volume is expected to be down approximately 1%. Operating company's income is forecast to increase between 5% to 7% in 2007, excluding currency, restructuring charges, and the 2006 Dominican Republic gain.
This concludes my introductory remarks and now I will be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. We will now conduct the question-and-answer portion of the conference. (Operator Instructions). Your first question is coming from David Adelman with Morgan Stanley. Please go ahead.
David Adelman - Morgan Stanley
Good morning, Dinny.
Dinny Devitre
Hi. Good morning, David.
David Adelman - Morgan Stanley
Let me ask you a few things, Dinny. First let me start with PMI. Why isn't the business in Japan performing better, and in particular, Marlboro? I thought part of the premise, obviously, with the take-back, was to drive that brand's performance and the share has been stagnant. So what's happening there and what's the strategy to improve business in Japan?
Dinny Devitre
Yeah. David, I am going to start-off by saying that we are disappointed with our performance in Japan. There is no doubt about that. At the same time, we are determined to renew the market-share growth that we enjoyed for many years until recently, and we are really very focused on our actions in that market.
Now, looking specifically at our market share loss in the third quarter, we were down 0.6 points. All that loss came from Lark, which is not doing as well as we'd like it to do. On the other hand, Marlboro, in fact you are right, it was increasing its market share in the past. And the fact was that at the time it was increasing its market share, it had a fairly convenient price. It was 300 Yen and below. At the 320 Yen price level, that's a pretty high price point and Marlboro is by far the largest brand in that price category, and it has hit some headwinds.
On the other hand, we've recently introduced some pretty innovative line extensions for Marlboro. There has been Marlboro Menthol Ice Mint, which has been introduced in some areas of Japan and it's off to a very strong start. We have other plans for Marlboro which would keep the brand growing. But I'll just come back to the starting point and that is that we are not happy with the way things are there, and we are determined to make a change and renew our market share growth.
David Adelman - Morgan Stanley
Okay, fine Dinny. And then in China, the agreement with the CNTC was signed almost two years ago. What's the status there? Is there any visibility on starting shipments and production of Marlboro in that market?
Dinny Devitre
Definitely, we are slower than we expected. We would have expected that by this time, the Marlboro license agreement would have fructified into actual production that has not happened. I can tell you, we are in close touch and working very cooperatively with CNTC, but I can't give you a date at this time as to when we are going to start the Marlboro license production.
David Adelman - Morgan Stanley
Okay, and then if I shift Dinny to the United States. Was the September price increase part of PM USA's business plan coming into this year?
Dinny Devitre
Yeah, more or less, yes.
David Adelman - Morgan Stanley
Okay. And if there is, Dinny, whether it's leaving aside the exact timing or the magnitude, if there is a substantial increase in the Federal Excise Tax, do you think PM USA is prepared to at least temporarily de-emphasize its historical relative focus on market share to go more for profitability?
Dinny Devitre
Well David, we never talk about pricing strategy, so I am going to stay away from that question. I will tell you regarding FET. We don't know what's going to happen to FET. We believe the Veto will be sustained tomorrow, but we don't know what's going to happen to the FET. We are against the FET as an industry. We think this industry is already over-taxed and that a Federal Exercise Tax increase would create unintended, unfavorable consequences.
David Adelman - Morgan Stanley
Okay, fine. And then Dinny lastly, to more generally subsequent to the end of the quarter, have you now recouped the $1.3 billion escrow in Engle?
Dinny Devitre
No, not as yet.
David Adelman - Morgan Stanley
Okay. And lastly, will the two individual businesses, Dinny are they likely to articulate or have their respective boards authorized share repurchases prior to the PMI spin, or will that come after the spin is completed?
Dinny Devitre
The Altria board will specify the share buy-back program and we will announce it sometime before the spin.
David Adelman - Morgan Stanley
Okay. Thank you very much.
Dinny Devitre
Okay.
Operator
Thank you. Your next question is coming from Judy Hong with Goldman Sachs, please go ahead.
Judy Hong - Goldman Sachs
Hi, Dinny.
Dinny Devitre
Hi, Judy.
Judy Hong - Goldman Sachs
Just looking at PMI, sort of taking a broader view of what's going on in terms of how you think about the volume and pricing trade-off, because right now it seems like you are getting improved pricing in many markets around the world. But volume has suffered to some extent because of that. And I'm just wondering, as you sort of think about going forward, will there be increased focus on volume growth or will we continue to see this business volume flattish or maybe down slightly, but really getting pretty good growth because of the price mix improvement?
Dinny Devitre
I think we've got to look at this question sort of over a longer period of time than just a quarter or even a year, and clearly PMI wants to balance volume and profit performance. This year PMI has increased its focus on achieving revenue growth and income growth and this is clearly evident in the numbers, Judy. You can see, for example, that on an apples-to-apples basis, revenue was up 4.5% and OCI 10%, and these are strong numbers by any measure.
I'd also like to point out that if you examine our brand mix and categorize our portfolio into three buckets from the most profitable to least profitable, we've kept the contribution of our top bucket, and I'm comparing these buckets between the third quarter of this year to third quarter next year. We've kept the contribution from our top bucket fairly flat in percentage terms. We've grown our middle bucket significantly and we've reduced the contribution of our lowest profit bucket. In fact, we have shared what I would refer to as some volume fodder.
Going forward, it's clearly PMI's objective to seek an optimal balance between volume performance on the one hand, and revenue and OCI growth on the other hand. Having said all that, it's important to note that PMI must be given credit for the volume it gets from acquisitions. Acquisitions are part of the business. It's not a one-time thing. And if you look over the last five years, we've had positive volume growth every year. And so, acquisition is very much part of the base business.
Organically, obviously, the volume decline we had in third quarter of 1.9%, actually it was 1.7% when you adjust for the fact that the duty-free business which used to be managed by PMI and recorded in PMI's volume, which has now been transferred to Philip Morris USA. If you account for that, volume was down 1.7%. But even that is a too high a decline. We are very definitely aiming to have flat to slight growth in our volume, and balance that with good operating profit.
Judy Hong - Goldman Sachs
Okay. And then just looking at the US market, are you seeing any sequential improvement in the industry consumption trend as we enter the second half of the year versus first half? And secondly, just in terms of the clarification on your shipment numbers in the third quarter, was that held by the inventory loading that took place this quarter, or was there something last quarter that affected that number?
Dinny Devitre
No. It was held by the fact that this quarter ended on a Sunday. Sunday is like a half day and it got included in this quarter. Normally, a Sunday gets thrown into the following week which is the normal way we handle accounting for volume. But this year, the last day of the quarter was a Sunday. So you could say that the quarter benefited by half a day, compared to last year's quarter.
And the first part of your question regarding the consumption rate, it is improving. And volume was down, I'd say more than 4% clearly in the first quarter, above 4% in the second quarter and is trending down into the 3% to 3.5% range in the third quarter. And so for the year, we are going to end between 3% and 4%.
Judy Hong - Goldman Sachs
Okay. And then finally, if you have any update on the existing tender offer at this point?
Dinny Devitre
No. No update at this point.
Judy Hong - Goldman Sachs
Okay. Thanks Dinny.
Dinny Devitre
Thank you.
Operator
Thank you. Your next question is coming from Erik Bloomquist of JP Morgan. Please go ahead.
Erik Bloomquist - JP Morgan
Hi. Good morning, Dinny.
Dinny Devitre
Good morning, Eric
Erik Bloomquist - JP Morgan
I wanted to start off on PM USA. I was just wondering if you could help me understand why Basic was weak in the quarter? Are you seeing an increase in discount competition? If you could just give us some color around that.
Dinny Devitre
Well, Basic was down in the quarter. There have been quarters when it's been up. There have been quarters when it's been down. This quarter unfortunately lost 0.2 points. There is quite a lot of competition from low price bands, not just the deep discount brands, but even low-priced bands from the major manufacturers. And that has affected Basic in the third quarter.
Erik Bloomquist - JP Morgan
And is that competition increasing or intensifying? Or is that simply just kind of the way the business unfolds through the course of the year?
Dinny Devitre
It's the latter.
Erik Bloomquist - JP Morgan
Okay. Thank you. With respect to PMI then, the view in Germany, it seems like its remaining somewhat in more negative than I had anticipated. Are we still seeing lots of down-trading or shift of volumes from the sticks product? Is that going to fine-cut? And when do you think we may see some stabilization in the German market?
Dinny Devitre
Yeah. The German market declined I think about 5% in this quarter and that decline was exacerbated by the fact that the third quarter in last year, in fact benefited from the World Cup event, with retailers restocking in the third quarter of last year. And so, that did have some impact. But nevertheless, the decline rate is still somewhere in the 3% to 4% range. And the sticks switchback has gone more to a fine cut as well as obviously unfortunately the cross-border business has benefited from this switchback from portions. At the same time, the lower priced segment in Germany is growing. Our own L&M is doing very well but so are the lower priced brands from our competitors.
Erik Bloomquist - JP Morgan
Okay. Thank you. And then lastly on Japan, you said that you expected the volume up about 4% and market share a bit lower than in Q4 '06. Are you attributing that to the price increase that you have taken in October this year?
Dinny Devitre
No. I don't think so. Because the price increase we took in October this year just covered about 12% of our volume, and the problem remains really with [luck].
Erik Bloomquist - JP Morgan
Okay. Sorry, I had one more if I may. In the PMI filing, it showed most of the stockholders equity in Philip Morris International. Could you help us think about how that may be allocated in the future with respect to PMI and then the Altria PM USA allocation?
Dinny Devitre
That goes to the heart of our capital structure, and that is just being deliberated on, Erik, and it will become evident over the next few months.
Erik Bloomquist - JP Morgan
Okay. Thank you, Dinny.
Dinny Devitre
Thank you.
Operator
Thank you. Your next question is coming from Filippe Goossens with Credit Suisse. Please go ahead.
Filippe Goossens - Credit Suisse
Yes, sir. Good morning, Dinny how are you doing today?
Dinny Devitre
Hi, Filippe.
Filippe Goossens - Credit Suisse
First question, just kind of going back to David's earlier question with regard to the FET; the industry is currently also lobbying against a proposal in the State of Oregon for an $0.85 increase in that tax revenue, if it were to be enacted in November. It looks to me as like it would go to the same kind of programs to help fund healthcare for children. Can you just kind of help me understand better if Oregon were to be enacted and there were to be an FET increase, how the two work together because they seem to be both aiming for the same objective?
Dinny Devitre
Yeah, that's a good question. But first of all, we do have -- we have joined a coalition in the Oregon matter and we are totally opposed to it. We are doing our best to persuade people that this is the wrong thing to do. We'll have to wait and see on November 7th, whether our persuasion has been successful or not. But I really can't answer that question exactly. My assumption, though, is that one is a federal excise tax increase the other is the state excise tax increase, and unfortunately they will be cumulative.
Filippe Goossens - Credit Suisse
Okay, then my second question. If we look at the 50 basis points in market share increase for Marlboro, how much of that, Dinny, is driven by initial inventory shipments for some of your product line extensions, both the Marlboro Smooth expansion as well as the Virginia Blend for Marlboro?
Dinny Devitre
Very little, most of it is just a core business of Marlboro.
Filippe Goossens - Credit Suisse
Okay, then moving quickly to Germany. In your prepared comment as well as in the press release, you referred to inventory loading by competition. Was that pretty broad-based or was it just one particular player out there?
Dinny Devitre
It was just one particular player out there and that load was $600 million in the third quarter of this year, but the same player made a load of $300 million in the third quarter of last year.
Filippe Goossens - Credit Suisse
Okay. Then moving to the smokeless marketing initiatives there or test marketing, given that you have tested tobacco for a little over a year, how long do you think you'll need with the Snus test in Dallas before you will have enough data points to make a decision whether to roll this out nationwide or not?
Dinny Devitre
The test marketing you referred to is the one-year test market, but that was for a totally different brand. Here we are starting-off with Marlboro. It's been in the test market only two months. I think it went into test market retail on August 8th. And I really can't give you a time Filippe. I think we will just have to study this very carefully. It's a very, very important initiative and I am not in a position to give you either time or whether this is going to be a step-by-step extension of the test market. I am sorry, we will just have to wait and see.
Filippe Goossens - Credit Suisse
Okay. Then few months ago, you filed a couple of lawsuits related to contraband without the internet retailers. You have not commented for some time now on the historic agreement you signed a number of years ago with the European Union, where you joined forces to fight contraband. You did mention that Germany cross-border traffic is still an issue. Can you just give us quickly an update in terms of how your initiatives are currently progressing with regard to contraband, etcetera in Europe?
Dinny Devitre
Actually they are going very well. Our cooperation with Europeans is terrific. We are working closely together and there is very little I can add. The references you make to the suits against contraband and counterfeit, it was in the United States.
Filippe Goossens - Credit Suisse
Correct.
Dinny Devitre
So I really don't know what the status on that is. But I can tell you that in Europe things are progressing very well and there is very solid cooperation.
Operator
Thank you. Your next question is coming from Bonnie Herzog with Citigroup. Please go ahead.
Bonnie Herzog - Citigroup
Good morning, Dinny.
Dinny Devitre
Hi, Bonnie.
Bonnie Herzog - Citigroup
Hi. Obviously, a lot of questions have already been asked. So, I also just have one and I don't mind if you can tell us too much about the progress that has been made regarding the Form 10 that you have filed. Any feedback that you have heard or anything else you have heard regarding the other items that need to be achieved before you can officially spin-off PMI?
Dinny Devitre
Well, I think the first thing to note Bonnie is that the Form 10 is a work-in-process. We filed at the end of September and we expect to receive comments from the SEC at the end of October. So, within the next week or so, I think we should receive some comments. We will then make necessary amendments and there will be an innovative process between now and the end of the year or a fluid process where they ask us questions, and we give them replies, etcetera, etcetera.
This will continue till the end of the year. Then in February next year, we will drop in the final 2007 data with regard to financials and everything else including the CD&A data etcetera. And then we have a final Form 10, which we will present to the SEC, I think like in the first week of February.
Bonnie Herzog - Citigroup
Okay. That helps. Thank you very much.
Dinny Devitre
Thank you.
Operator
Thank you, your next question is coming from Ann Gurkin with Davenport. Please go ahead.
Ann Gurkin - Davenport
Good morning, Dinny.
Dinny Devitre
Good morning, Ann.
Ann Gurkin - Davenport
I wanted to follow-up on a comment you made about the Ukraine benefits from consumer up-trading. And just if you can expand on that comment, where is your confidence that up-trading will continue, not only in Ukraine but throughout to the open markets over the next two years, and what's the biggest risk to that trend?
Dinny Devitre
Yeah. I think we are seeing up-trading in a number of markets. The Ukraine is one example. Russia is another example. I think in most eastern European markets, we are seeing this up-trading. We are also noticing it in markets such as Turkey. So, there's a sense that consumers are clearly up-trading in the developing markets. That's obviously good for the business. I think the only thing that can upset that movement is if there's some major worldwide financial crisis and certainly I am not going to predict one way or the other on that. So, I can't see anything specific coming in the way of the current trend of up-trading that we are seeing in a number of developing markets around the world.
Ann Gurkin - Davenport
Great. And then switching back to the US, the plan as I know it is just a shift sourcing of volume from Cabarrus by the third quarter of 2008. What's the risk that timing might shift out to 2009?
Dinny Devitre
No. I think we are pretty much on schedule.
Ann Gurkin - Davenport
You are on schedule to shift most of the volume by Q3 '08.
Dinny Devitre
Yeah.
Ann Gurkin - Davenport
That's great. Okay, great. Thanks.
Dinny Devitre
Thank you.
Operator
Thank you. Your next question is coming from Christine Farkas with Merrill Lynch. Please go ahead.
Christine Farkas - Merrill Lynch
Thank you very much. Just a quick question, Dinny, if I could on the global markets. You have touched on the trading up. If we were to pull out currency from your top line at PMI and if I've done the math correctly, it looks like the top line actually declined. I understand the volume decline. But can you talk about the price increases offset by the country mix in that top line? Thank you.
Dinny Devitre
I don't think that's correct what you just said. When you're talking of top line, if you're talking of revenues, net of excise, net of currency, we were up.
Christine Farkas - Merrill Lynch
It was up. Okay. It must be my miscalculation and that was the only clarification I needed. Thanks Dinny.
Dinny Devitre
Thank you.
Operator
Thank you. Your next question is coming from Chris Growe with A.G. Edwards. Please go ahead.
Chris Growe - A.G. Edwards
Hi, Dinny. Good morning.
Dinny Devitre
Hi, Chris.
Chris Growe - A.G. Edwards
I just want to follow up. I had a question relative to Christine's question there just on mix in general, but it's hard to calculate. I did have a different calculation than she did. I had a pricing, if you will, up 2% to 2.5%. Is there a negative mix just because of the way some of you had big shifts in certain markets that worked against this quarter?
Dinny Devitre
Well certainly, our volume was down for the quarter. And therefore, clearly income was down because of that. As far as mix is concerned, it was slightly positive compared to the same quarter last year. And if you recall my first explanation to I think David's question, when I spoke about comparing this quarter to the third quarter last year and looking at those three buckets from most profitable to least profitable. And if you look at those buckets, the most profitable has stayed fairly steady in terms of percentage contribution. The middle bucket which is fairly profitable has grown and the lowest, least profitable bucket has declined in terms of contribution and that would suggest that our mix is improving.
Chris Growe - A.G. Edwards
Okay. That's very helpful. I had some quick follow-ups for you. Just relative to your foreign exchange, the $0.04, if you will boost to guidance, does that put you pretty much like a current rate? Is that a good reasonable estimate?
Dinny Devitre
Yeah.
Chris Growe - A.G. Edwards
Okay. And then the Engle escrow, should that come back in Q4? Is that correct or --?
Dinny Devitre
Well we'll just have to wait and see regarding the Engle escrow it is tied up with certain legal issues and we are not sure that we are going to get it back this year or next year.
Chris Growe - A.G. Edwards
Okay. And then the last question I had for you was, you outlined a number of countries where you had some temporary gaps, if you will, in pricing and that led to some weak volumes, whether it’s Indonesia, in the Czech Republic, Russia, Poland, a few others. It looks like Q4 could be a much better kind of volume growth quarter. Would that fit with your internal view?
Dinny Devitre
Not much better, a little better, not much better.
Chris Growe - A.G. Edwards
Okay. Thanks a lot.
Dinny Devitre
Thank you.
Operator
(Operator Instructions). Your next question is coming from Erik Bloomquist with JP Morgan. Please go ahead.
Erik Bloomquist - JP Morgan
Hi, Dinny. I just wanted to follow up on the answer you gave to David on the buyback. What I heard was that you said the Altria board will announce the buyback prior to the PMI spin. Could you clarify and extend on that please?
Dinny Devitre
The only thing clarification I can give is I'm talking about the current Altria board.
Erik Bloomquist - JP Morgan
Okay, and so that will be a buyback pertaining to Altria’s post spin?
Dinny Devitre
Altria and PMI post spin
Erik Bloomquist - JP Morgan
Okay so the announcement will discuss the aggregate buyback for the entire Altria group and then how that's allocated between PMI and PM USA will be clarified post spin?
Dinny Devitre
No, it will talk about the buyback plans for PMI separately and Altria separately.
Erik Bloomquist - JP Morgan
Okay, and that will be announced prior to the spin being completed?
Dinny Devitre
Yes.
Erik Bloomquist - JP Morgan
Okay. But post the announcement of details on the spin on January 30?
Dinny Devitre
Yes.
Erik Bloomquist - JP Morgan
Great, thank you very much.
Dinny Devitre
Okay.
Operator
Thank you. (Operator Instructions). Your next question is coming from Chris Burritt with Bloomberg News. Please go ahead.
Chris Burritt - Bloomberg News
Dinny, this is Chris Burritt with Bloomberg.
Dinny Devitre
Hi, Chris.
Chris Burritt - Bloomberg News
The PM USA folks in Richmond are giving a press tour of your new R&D center tomorrow. And from the corporate view, can you give some inside into your expectation of how that facility is going to develop products that are going to contribute to PM USA down the road?
Dinny Devitre
Well Chris, as we've said in the past, the R&D center which I think is already being -- we've already got some employees in there. I think the R&D center will be completely operational by, I think the second quarter of next year. As we've said before, the purpose of that center is to give Philip Morris USA a much brighter future in terms of its products both through the improvement of current products, the development of new innovative products, the development of harm reduced products, and certainly also a leg-up in the smokeless category. So, the investment is large. It's going to be a state-of-the-art first class research and technology center and we're pretty sure that it will bear fruit for Philip Morris USA both in terms of volume and profitability in the years ahead.
Chris Burritt - Bloomberg News
Thank you. And quickly, on Marlboro pricing, what was the average price in the third quarter and how much was that up from the year earlier?
Dinny Devitre
The price for Marlboro was 418 for the third quarter of this year and the same time last year, it was 394.
Chris Burritt - Bloomberg News
Thanks very much.
Dinny Devitre
Okay.
Operator
Thank you. There appear to be no further questions. I'd like to turn the floor back over to management for any closing remarks.
Nick Rolli
Well, thank you all for joining us on the call today. And we're available here at Altria Investor Relations for any follow-up questions. Thank you very much. Have a great day.
Operator
Thank you. This does conclude today's Altria Group's third quarter 2007 earnings conference call. You may now disconnect.
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