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Executives

Nicholas Rolli - Vice President of Investor Relations & Financial Communications

Hermann G. Waldemer - Chief Financial Officer

Analysts

Judy E. Hong - Goldman Sachs Group Inc., Research Division

David J. Adelman - Morgan Stanley, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Rogerio Fujimori - Crédit Suisse AG, Research Division

Jonathan Leinster - UBS Investment Bank, Research Division

Jonathan P. Fell - Deutsche Bank AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Erik A. Bloomquist - Berenberg Bank, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Michael Lavery - Credit Agricole Securities (USA) Inc., Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Thomas Adrian Russo - Gardner Russo & Gardner

Priya Ohri-Gupta - Barclays Capital, Research Division

Philip Morris International (PM) Q1 2012 Earnings Call April 19, 2012 9:00 AM ET

Operator

Good day, and welcome to the Philip Morris International First Quarter 2012 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International's management and the question-and-answer session. [Operator Instructions]

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

Nicholas Rolli

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2012 first quarter results. You may access the release on our website at www.pmi.com.

During our call today, we'll be talking about results for the first quarter 2012 and comparing them with the same period in 2011, unless otherwise stated. References to volumes are to PMI shipments. Industry volume and market shares are the latest data available from a number of internal and external sources. Organic volume refers to volume excluding acquisitions. Net revenues exclude excise taxes. Operating companies income, or OCI, is defined as operating income before general corporate expenses and the amortization of intangibles. You'll find data tables showing adjustments to net revenues and OCI for currency, acquisitions, asset impairment, exit and other costs, free cash flow calculations and adjustments to earnings per share, or EPS, as well as reconciliations to U.S. GAAP measures at the end of today's webcast slides, which are posted on our website.

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

It's now my pleasure to introduce Hermann Waldemer, our Chief Financial Officer. Hermann?

Hermann G. Waldemer

Thank you, Nick, and good afternoon, ladies and gentlemen. We once again achieved excellent results in the first quarter of this year. Our organic cigarette volume increased by 5.3%. Net revenues, excluding currency and acquisitions, were up by 10.9%. Adjusted OCI, also excluding currency and acquisition, increased by 14.2%. And our adjusted diluted EPS, excluding currency, rose by 19.8%.

Our strong business momentum continues, and this should enable us to perform well during the remainder of 2012, notwithstanding the previously disclosed difficult comparisons versus 2011 that we will face in the second quarter relating to the exceptional circumstances in the Japanese market during the post-tsunami crisis. Consequently, we remain very confident in our ability to achieve the business results that we predicted when we issued our reported 2012 EPS guidance last February. However, since that time, the U.S. dollar has strengthened against a number of currencies. As a result, we are facing a slightly stronger currency headwind and are now forecasting an impact of $0.15 in unfavorable currency this year based on prevailing exchange rates compared to the $0.10 previously disclosed in February. As a result, for exchange rate reasons only, we are revising our reported diluted EPS guidance for 2012 by $0.05 to a range of $5.20 to $5.30. It should be stressed that compared to our 2011 adjusted diluted EPS of $4.88, we are maintaining our forecast growth in the reported diluted EPS for 2012 of approximately 10% to 12% on a currency-neutral basis. Our forecast growth is fully in line with our long-term growth target for adjusted diluted EPS, excluding currency.

One of the key elements favorably impacting our business is the reasonable excise tax environment. While there have been increases, most recently in Spain, we have not seen any disruptively large changes in any key markets this year. On the structural side, we continue to witness further improvements via a gradual increase in the specific proportion of excise taxes. Many governments now recognize that higher specific elements reinforce the predictability of government tobacco excise tax revenues.

Pricing continues to be the most important single driver of our profitability. The pricing variance was $369 million in the quarter. The increased prices, notably in Argentina, Germany, Indonesia, Italy, Korea, Mexico, the Philippines and Russia, and continued to benefit from the annualization of higher prices from last year. We also generated a positive volume mix variance of $224 million at the OCI level as we grew volume and benefited from consumer up-trading in a wide range of non-OECD markets.

The 5.3% quarterly organic cigarette volume growth is our best performance since the March 2008 spin. While boosted by the leap year and an undemanding comparison to the prior year, the improvement was notable for its wide geographic spread. The Asia region led the way with a 12.4% increase. The growth in the EEMA and Latin America and Canada regions was around 3%. And the moderate decline in the EU region of 1.5% was the best performance in many years. In fact, volume increased in the first quarter in 13 of our top 15 largest markets by volume.

This performance reflects the breadth of our superior brand portfolio. In the first quarter, every one of our top 10 brands by volume grew. The small growth, notably adding 3.6 billion units compared to the first quarter of 2011.

We are thus able to continue our strong market share growth momentum. Our market share in our top 30 OCI markets was estimated at 37.3% in the first quarter of 2012 compared to 36.6% for the full year 2011 and 35.5% in 2010.

Asia is our principal growth engine. The region as a whole is benefiting from a solid economic environment, a growing adult population in many markets and increasing consumer purchasing power. Our organic cigarette volume grew by 12.4%, led by Indonesia. Excluding currency and acquisitions, net revenues and adjusted OCI increased by 16.3% and 23.7%, respectively.

Total industry volume in Indonesia grew at a double-digit pace in the first quarter. On a full year basis, we forecast an increase in the range of 6% to 8%. Meanwhile, our shipment volume grew by 24.9% in the quarter, making Indonesia the single largest market for PMI by shipment size. Our market share was 3.5% higher at 33.4%. This tremendous result was achieved through the excellent momentum behind our leading machine-made, premium lower tar nicotine brand, Sampoerna A, and the strength of our overall portfolio, which also includes premium Marlboro, mid-price U Mild and low-price brands. Our premium portfolio added over 3 billion units and accounted for over 60% of our market share gain in the quarter.

The underlying trend in Japanese industry volume has continued to improve. We are forecasting a moderate underlying market decline of approximately 2% in 2012 as smoking incidence has remained stable since the middle of last year. Our first quarter market share was 28%, well above the previous year at 25.6% and just slightly below the fourth quarter 2011 level. Our share was impacted by trade purchases of new JT products in March when it dropped to 27.3%. So far, we have had just one new launch this year, Lark Hybrid 100 millimeter, which achieved a satisfactory 4.4% market share in March. Both Marlboro and Lark remain strong, and we have a full pipeline of new consumer innovative variants that we plan to launch in the coming months.

In Korea, we implemented in mid-February a price increase of KRW 200 per pack to KRW 2,700 on Marlboro, Parliament and Lark, which accounted for over 80% of our volume in 2011, while making some necessary practical price adjustments to Virginia Slims. The preliminary indications are that as expected, we have given back a large part of the share gains from the previous temporary price advantage in return for a significant margin improvement. Our endeavors to secure a reasonable long-term reform of excise taxation has been delayed by the parliamentary elections that took place early this month, but we will renew our efforts now that they are over.

Our results in the EEMA region were very strong in the quarter. Organic cigarette volume grew by 3.4%, driven in particular by Algeria, Saudi Arabia and Turkey, and only partly offset by a reduction in sales in Egypt due to a surge in illicit trade. Our mix was favorable as adult smokers traded up to premium and mid-price brands. We increased prices in the quarter, most notably in Russia. And pricing was also a key driver of our higher profitability. Excluding currency and acquisitions, net revenues and adjusted OCI were 12.6% and 18% higher, respectively, while we continued increase our investments behind Marlboro and other key brands.

The strength of the economy has enabled the Turkish market to rapidly absorb the impact of the tax-driven price increases that occurred in the fourth quarter of last year. Our volume increased by nearly 10% in the first quarter of this year as our portfolio continued to perform strongly. And our year-to-date February Nielsen share grew by 0.7 point to 44.6%. Our mix has also improved behind premium Parliament and mid-price Muratti.

In Russia, recent price increases have not prevented adult smokers' appetite for up-trading. Our above-premium brand, Parliament, continues to perform very strongly and gained a further 0.3 point to reach a record 3.2% Nielsen share year-to-date February. Along with the strong performance of low-price Bond Street and Next Slims, this has enabled us to grow our overall Nielsen share through the end of February from 25.5% last year to 26.2%. We remain optimistic that we can further strengthen our position in Russia as the preliminary results of our new marketing programs and additional investments behind the Marlboro and other key brands are showing early signs of promise.

In the EU region, total industry volume was down a modest 1.3% despite weak economic conditions, notably in Greece and Spain. Both L&M and Chesterfield continue to gain share in the region. Their market shares were up 0.3 and 0.4 point, respectively, to a combined 9.8%. L&M is growing in particular in Germany, Poland and Slovakia, while Chesterfield is performing particularly well in Austria, Portugal and Spain. Marlboro's performance remains resilient though its market share was down in the region as a whole by 0.3 point to 17.5%. Marlboro gained share notably in Belgium, the Czech Republic, Greece, Hungary and Portugal, while its share loss in Germany was attributable to a temporary price disadvantage. Higher prices, notably in France, Germany, Italy, Poland, Spain and the U.K. enabled us to return to solid profit growth in the region. Net revenues and adjusted OCI were 5.3% and 3.7% higher, respectively, excluding currency. During the quarter, we continued to invest behind the new Marlboro campaign and consumer element innovative line extensions, such as Marlboro Beyond.

Unemployment continues to increase in Spain with no short-term expectation for any improvement. This is putting further pressure on the total market volume for cigarettes. During the first quarter, PMI's market share declined slightly to 30.2% despite an improved performance for Chesterfield. As part of their measures to reduce the budget deficit, the Spanish government recently increased excise taxes on cigarettes, along with a restructuring that increased the relative importance of the specific element. In response, we raised our prices by EUR 0.25 per pack across our portfolio despite the government's failure to increase the minimum excise tax.

In Italy, cigarette industry volume declined by 6.1% in the first quarter, partly offset by strong growth in the fine cut market which remains relatively small at around 6% of total tobacco consumption. The key drivers of this decline are higher prices that have boosted industry margins and government revenues and more difficult economic conditions. While unemployment still remains below 10% in Italy, consumer purchasing power is under pressure. There has therefore been some customer down-trading from premium and mid-price cigarettes to low-price international cigarette brands and fine cut. This led to an erosion of 0.9 point in our cigarette market share to 52.6% in the first quarter. To address these trends, we launched Chesterfield fine cut in the second quarter of 2011. This move has reinforced the brand as it has steadily increased its share of the total tobacco market and enabled us to achieve market leadership in fine cut in the first quarter of this year with a 28.3% share. Our latest initiative was the launch during the first quarter of this year of Philip Morris Selection in the growing international low-price cigarette category, where we are underrepresented. Along with the higher prices, these strategies should enable us to maintain our profitability in this important market going forward.

The economies in the northern part of Europe show more favorable trends as illustrated by Germany. Cigarette industry volume was up 3.1% in the first quarter as the economy remained robust and contraband was reduced. The German authority recently closed down 2 important smuggling rings, whose annual supply was estimated at some 400 million cigarettes. Marlboro was the first key brand to be sold in Germany at higher prices following the January tax increase and thus suffered a market share decline in the first quarter of 0.8 point to 20.4%. Nearly all competitive brands are now selling at new prices, so we expect an improved Marlboro performance going forward. Our optimism is backed by the promising results from the initial phases of the new Marlboro "Don't Be A Maybe" campaign. Marlboro's share amongst young adult smokers, minimum 18 to 24 years old, increased by 5 points in the first quarter to become the leading brand in this adult age group, along with L&M with a 20% smokers share for each of the 2 brands.

PMI achieved an overall increase of 0.2 point in its cigarette market share in the first quarter at 35.9%. This was driven by the continued strong performance of L&M. The brand grew a further 1.2 share points in the quarter to 11.2%. As this remains well below its young adult smokers share, we expect to be able to continue to expand L&M share in the German market going forward. We also successfully increased our quarterly share in the fine cut market, with a gain of 0.9 point to 15.8%. This was driven by our 2 key cigarette brands, Marlboro and L&M.

The Latin America and Canada region was a solid contributor, again, in the quarter. Organic cigarette volume grew by 2.9%, thanks to share and market growth in Argentina and favorable timing and trade inventory movements in Mexico. We increased our share in Colombia and Mexico, where Marlboro continued to perform well, with gains of 1.5 and 4 points, respectively. Excluding currency, adjusted OCI increased by 4%.

On a global basis, the illicit trade in cigarettes is estimated at some 600 billion units. While at times a risk, it also offers PMI a very significant volume and profitability opportunity. The potential benefits of cooperation underpin our joint efforts with many authorities across the world. Canada, Germany and Romania are recent examples of successful reductions in contraband. In this context, we welcome measures being proposed by the provincial government in Ontario to reinforce its laws against illicit trade. Based on similar measures, the Québec government has stated that it increased its provincial tobacco tax revenues by more than $200 million over the last 2 years.

Free cash flow was $1.7 billion in the first quarter, a decline of 23% excluding currency. Net earnings increased by $245 million, or 12.3%, confirming that the business fundamentals are in excellent shape. This was, however, more than offset by $742 million increase in our working capital and other requirements due mainly to the timing of receivables in the quarter and industry forestalling in the EU region, a phenomenon that should be fully reversed as the year unfolds. Let me remind you that forestalling occurs when manufacturers build up inventory in excess of normal supply chain requirement ahead of an excise tax increase. This competitive phenomenon becomes an issue whenever the payment of the excise taxes occurs prior to the depletion of the finished goods inventory. We are therefore working with governments to introduce and, when necessary, reinforce anti-forestalling measures. This would reduce our working capital requirements and provide governments with higher tax revenues without undue delay.

In addition, capital expenditures are higher this year. We are investing in productivity-enhancing factory modernization, equipment for innovative new products, the consolidation of our operations in the Philippines, the expansion of our capacity in Indonesia and other projects. At the same time, we are on track to deliver on our $300 million pretax productivity target in 2012.

During the first quarter, we spent $1.5 billion to repurchase 18.1 million shares at an average price of $83.07. Our target remains to spend $6 billion on share repurchases this year. Since the spin through the end of March this year, we repurchased a total of 432.1 million shares at an average price of $52.88. Our annualized dividend of $3.08 per share generated an attractive yield of 3.5% at the market close last Friday. Since 2008, we have increased our dividend rate by 67.4% under our policy that targets a 65% dividend payout ratio. We continue to generate superior shareholder returns compared to our tobacco peers, our wider consumer product peers group and the broader market.

In conclusion, the first quarter of 2012 has been another excellent one for PMI. Organic volume was very strong, and we benefited from consumer up-trading in non-OECD markets. All our key brands are performing well, led by Marlboro and Parliament. We are fully on track to deliver again in 2012 against our currency-neutral, long-term target of 10% to 12% adjusted diluted EPS growth. In the first quarter, we once more outperformed our tobacco and broader consumer product peers in terms of shareholder returns. We remain very confident about our outlook for the remainder of the year and beyond, notwithstanding the difficult comparison we will face in the second quarter due to Japan.

Thank you for your continued interest in our company and its excellent growth prospects. I'm now happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Judy Hong of Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

So just in terms of your guidance for the full year, notwithstanding the currency guidance change but just underlying x currency guidance, just because you had a pretty strong first quarter, it kind of implies that the rest of the year would show some slowdown in terms of the year-over-year. So other than the comparison issue, how are you thinking about the balance of the year? Are there anything just at the margin, whether at the macro level or competitive level, that's giving you some caution here? Or is it just really too early in the year and you just want to see how the year unfolds?

Hermann G. Waldemer

I think the most important point is really your last point. We are early in the year. Yes, we are facing a difficult comp in Q2. But the underlying business, as I said also in the prepared remarks, is in very good shape. We're very happy. There is no -- really no change in the business prospects that we had expected when we gave our initial guidance on the business side in February. It's just early in the year. There is always upside in life. There is also risks in business. That's why our guidance also is a guidance that spans $0.10.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then secondly in Japan, so it sounds like in March, the shipment share ticked down a little bit. Do you have the consumer offtake share for March? I'm just trying to understand how effective some of these competitive activities and the load then is translating at the consumer level.

Hermann G. Waldemer

Yes, I think -- I mean, if you look at really the shipment shares in January at 28.3, February at 28.5 and then March, 27.3, it is pretty obvious that it's influenced by competitive trade load. The fact, simply, is that we only have had so far one launch this year, the Lark Hybrid One 100s. In the same period, JT had 3 launches. Our pipeline is also there. This is going to come in the next months. So I think we are in a very good position. The market dynamics are back to normal. Again, the novelty impact is always there in Japan. You were asking for offtake shares. They are very, very slightly below 30%. So that's a very, very small decline to what we had seen the 2 months before. Also, that one, I would say, is driven by the novelty and the trial of new products that have come to the market.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then finally in Europe, you called out the volume performance obviously down 1.5%. You had somewhat of an easy comp, but just in terms of the decline being more modest in that market, if you can just maybe more recently, some of the increased -- again, renewed concerns about the macros and the consumer sentiment there, how do you think about your ability to continue to see improvement in Western Europe?

Hermann G. Waldemer

Well, I think there are -- Europe is, of course, a mixed picture, as we all know. And if you just take the 2 extremes, if you like, on the growth and on the more difficult side, the German cigarette market has been growing 3.1% in the first quarter versus previous year. Whereas in Spain, while there was some growth, but there is really just, due to very, very undemanding comps in the first quarter of last year, that really the retailers have brought down their inventories quite a bit. The Spanish economy continues to be very difficult. Unemployment continues to increase. So I, again, would expect the Spanish market for the full year still to be down at least 10% again. So let's not be misled by the first quarter. There is quite a mixed picture, but if we really kind of step back for a moment and look at really what has happened more on a macro basis in terms of volume trends, then I would say, yes, the so-called more mature markets, the decline rates have really moderated if you compare that to, say, 3 years ago. At the same time, in a number of emerging markets, the growth rates actually have accelerated compared to 3 years ago. And that, of course, taken together, combined with our great portfolio and our momentum also in terms of market share, provides us with potential opportunities for further volume growth and for good performance that's more from a macro picture.

Operator

Your next question comes from David Adelman of Morgan Stanley.

David J. Adelman - Morgan Stanley, Research Division

I know you normally don't talk about specifics about discrete quarters, Hermann, but given the unusual dynamics you faced in Q2 both with Japan and currency, is it realistic to expect EPS to be down in the second quarter? That's certainly my forecast at this point.

Hermann G. Waldemer

Well, David, we have never made really or given quarterly guidance. I won't do it now as well either. I mean, the 2 points really to keep in mind here are that the hurdle due to Japan is about $0.10, EPS cents. So the calculation there really is the market in Q2 in Japan was about 45 billion cigarettes, our market share was 42, our retention share is about 28. That makes a difference of 14. Multiplied on the market size is a volume hurdle of about 6.3. You take the margin, you take the cost, you deduct the tax, you divide by the number of shares, and that brings you to about the $0.10. So that I can confirm or reconfirm. We have said that before. And other than that, I would really revert you back to the full year guidance because that's what really counts and our continued conviction that business fundamentals are doing well. We are doing extremely well. Things are good. Things are in order, and they keep on going as we had expected from the very beginning of this year.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then 2 other things, Hermann. I think in your prepared remarks, you indicated an expectation for Japanese cigarette consumption to be down about 2%. Did I hear that correctly for the year?

Hermann G. Waldemer

That is correct, yes.

David J. Adelman - Morgan Stanley, Research Division

Why do you think it's getting better? Because even prior to the excise tax increase, that market's rate of decline was substantially higher and arguably getting worse, going from 3%, 4%, 5% to 6%.

Hermann G. Waldemer

That's correct. And as I said in the question before also, I mean, it's not only Japan -- that trend of moderating decline rates in the so-called mature markets is a Japanese sentiment, it's also a European sentiment. It's really hard to pinpoint that down to what it is. The fact really is, in Japan now, completely back to Japan, that actually, the smoking rate has been stable. Smoking incidence has been stable since at least middle of last year.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then lastly, Hermann, with this continued growth in volumes in Indonesia, are there any issues on your capacity or the availability of cloves?

Hermann G. Waldemer

We are increasing capacity. That's part of the reason why CapEx is going up. Of course, we are adjusting our capacity to the needs there. On cloves, that's a cyclical harvest actually. Typically, you have a strong harvest in one year. You have a weaker harvest in the other year. 2011 was a weak year in terms of overall clove harvest. The indications for this year are good. It should be a strong harvest. And of course, that would lead to replenishment of the clove stocks that we would then, of course, perform.

Operator

Your next question comes from Bonnie Herzog on Wells Fargo Securities.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

I just wanted to start with a question on pricing. You mentioned you're clearly benefiting from price realization. So how realistic is it for this continue at these levels? And do you attribute this to your innovation effort, price management or more due to the health of the consumer? And then I'd just like to understand how aggressive you've been with your managing your GAAP?

Hermann G. Waldemer

Well, I would say managing price gaps has a lot to do with managing price structures and price -- tax structures, excuse me, not price structures, tax structures. And we have seen improvement in tax structures in many, many places. I give you a couple of recent examples. France increased the specific component at the end of last year. Spain, just right now, the excise tax increase there had at the same time are rebalancing from -- at the lower end to specific tax. They missed out on the minimum tax in Spain. Let's hope that it's going to be corrected going forward. Only at the beginning of this week, actually, in a press conference of the Deputy Prime Minister in Turkey and the Finance Minister in Turkey, they also announced that they will look at the structure of excise tax there without increasing overall tax burden and that will implement a specific element into the overall structure. Details, timing, all that remains to be seen. But that's, again, an important step forward. Again, also this week, a public announcement of President Putin in Russia that yes, there will be regular excise tax increases in Russia, but there shouldn't be any excessive excise tax increases there either. So a lot of improvement. Brazil earlier, where they began to do away with those many tax tiers that clearly were a disadvantage for Marlboro. So there is improvement in a lot of places and that helps. And then as well helps you and, as a consequence, helps us to put in the correct and the right price gaps.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, and then, Hermann, on volume, your volume growth was strong and then balanced across your region. And then drilling down into Asia, there is -- it sounds like a lot of the robust industry volume growth. I'd like to understand what's driving this growth other than, is it the growing population, GDP growth? Is it the consumer behavior, increased smoking incidence? I just kind of want to hear a little bit from you more color on this. And then understanding the underlying dynamics and then how sustainable this industry volume growth in Asia will be over the next 5 years?

Hermann G. Waldemer

Yes, I mean, if the origin is of course what you said, it is the overall economies. And many of those economies, take Indonesia as an example, have really excellent macroeconomic indicators. So Indonesia GDP growth is forecast at 6.5%. Consumer confidence is really high, inflation expectations of 5%, i.e., there is -- there are real wage increases there, so improved affordability. A growing adult population is, of course, another factor that plays in there. And when it all comes together and you have the right brands to compete in such a market, this is how you generate your volume growth, your market share growth overall. I mean, Indonesia, to stay with that example, has been growing a bit more than 12% in the first quarter. I don't expect that to happen for the full year, but I still expect a strong growth of about 6% to 8%. That factors in that in that market, eventually, the existing subsidies for fuel prices will be reduced. That's going to take out a little bit of the purchasing power. That's the reason why I would expect the 6% to 8%. But a 6% to 8% is, of course, again very strong growth. And in the Indonesian market, just to compare, it will now be well above 300 billion, i.e., at the size of the U.S. market or even slightly bigger.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, and then just a final question on your forecast for volume for the year, given the strength, I think you had talked about flattish growth for 2012 in terms of volume. Is it realistic to assume that you're going to see faster, maybe low single digit volume growth this year?

Hermann G. Waldemer

I would say, including the Japanese hurdle, I would continue to expect stable volume, eventually slight growth. If you would exclude the Japan hurdle, the 6.3 billion that I was quoting earlier, then we definitely expect strong organic growth. That wouldn't be that far away, actually, from the 1% target.

Operator

Your next question comes from Chris Growe of Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Just a question for you, if I could follow up on Bonnie's question right there about volume, I wonder, again, given the strength that you're seeing in your business, but broadly across the world and improving economies, Indonesia [ph], how do you see the overall tobacco market, from a volume standpoint, growing this year? Is it also down a little bit still this year? Or you've seen a better performance there overall?

Hermann G. Waldemer

The closing number is hard to predict, but I would say there are really many places in the world where relatively speaking, if you take the last 3 years' horizon, that our situation is actually improving. So what I mentioned earlier, really on more moderate decline in the mature markets and stronger growth in the emerging markets, there I can see it. At the same time, there are a number of markets where the potential or the actual up-trading has come back, that would be Russia. Russia is not going to be a growing market. I would expect again, say, about 2% decline this year, just like the 2 years before. But here, you have the up-trading element in there. So the combination of all those factors provides the basis for a continued growing and successful business for us.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. I want to ask you about 2 markets, the first one being Japan, just a quick question there. Do you expect that -- I think this comment was made on last quarter's call, that your constant currency profit would grow in Japan this year. Would that be a reasonable assumption?

Hermann G. Waldemer

Well, this is certainly what we are targeting and this should be about in that range, yes.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay, I just wanted to confirm that. And then just the second question, as it relates to Russia, you, obviously, had a good performance in Parliament, a little softer market share performance for Marlboro, and a lot of your growth came in the lower end with Bond Street and Next. Is that -- are you still -- are you seeing a trade-down effect? Obviously, you had one premium brand doing well and one -- and some lower-end brands doing well. But I just want to get a better sense of that market and then kind of how the consumers fare in there. And there is a trade-down factor in Russia is what I'm getting at there.

Hermann G. Waldemer

Well, the really declining volume -- segment is the low-price filter and non-filter segment. So there is up-trading in the market overall. Then don't forget that there was another price increase in the market. So if you like, people had to up-trade in any case because prices were going up. Then if you look through the portfolio, actually, Parliament, our above-premium brand, is growing tremendously, a record market share of 3.2%. That's really excellent. Yes, Marlboro in the quarter is still down 0.2% to a 2% share. Marlboro is on a low basis in Russia, as we all know. Well, that you also have to see in the context that we actually increased the price for Marlboro by RUB 5 to RUB 60, a price positioning measure we took there, which is just part of our overall efforts in that market. marketing sales price positioning product. Everything goes together how we want to bring back Marlboro in the growth track in the market. So don't pay too much importance to the 0.2% in the month. We are working on the equity of Marlboro and that, obviously, doesn't show from one quarter to the next. That's a longer-term investment, which we are willing to go.

Operator

Your next question comes from Rogerio Fujimori of Credit Suisse.

Rogerio Fujimori - Crédit Suisse AG, Research Division

Just one quick question about trading inventory movements. So you refer to a few movements in -- unfavorable in Russia, favorable in Ukraine. So I was just wondering if there's anything else we should bear in mind when we think about Q2.

Hermann G. Waldemer

Well, in terms of trade inventory movements or in, if you like, what I called undemanding comparisons in the first quarter, that would, of course, be Japan. That would be Mexico at the other end of the world. But otherwise, nothing in that sense unusual. There will always be trade inventory movements from one quarter to the next. That's pretty obvious, but nothing spectacular that I could see there.

Operator

Your next question comes from Jon Leinster of UBS.

Jonathan Leinster - UBS Investment Bank, Research Division

A couple of questions. First of all, I think on the EU side, you mentioned quite rapid declines in Portugal and Greece in volume terms. Is that something you can quantify? Are those seriously declining markets or not that important?

Hermann G. Waldemer

Well, for the individual market, Greece is of course -- the decline and the deterioration that we have seen in that market, it is important. If you apply then on the PMI scale in terms of comparisons, then of course, quarter-on-quarter there, last year to this year, Greece is not important. I mean, it's simply the situation in a Greece or in a Spain in our market reflects the very serious underlying problems of those 2 economies.

Rogerio Fujimori - Crédit Suisse AG, Research Division

So I mean, in rough terms, in terms of Portugal and Greece, what have they knocked off in terms of volumes?

Hermann G. Waldemer

The total market size is -- in Greece in the first quarter, now you test my memory. It must be not too much. So Greece, about 1.2 billion. It's in the range of 20% to 25% down in Greece. I mean, it really reflects what you see in the economy there, which is why I cautioned earlier on Spain, if you just look at the market this quarter, that would be misleading. It's just comparing to a first quarter of 2011 where retail -- where tobacco leaves have really bought down their inventories dramatically and where you had the first quarter where the full-fledged public smoking ban also came into effect. So Q1 Spain this year compares to a very weak Q1 Spain last year, which is why I said, I expect another at least 10% decline in Spain for the full year. And the 10% decline expectation is probably realistic for Portugal as well.

Jonathan Leinster - UBS Investment Bank, Research Division

Okay. Secondly, on the -- I mean, clearly, the volume growth in Indonesia is, well, almost unprecedented. But I mean, is there no comeback from the government in terms of rapid tax increases? Is there no sort of health -- sort of debate in Indonesia as to whether or not taxes should rise significant to offset the volumes?

Hermann G. Waldemer

Well, excise taxes have gone up also in Indonesia in the range of 7% to 8%, which compares to an inflation expectation of 5%. It's not that there are no excise increases in this part of the world. There are. It's just the overall economy. The environment is simply a growth environment, a strong growth environment. And it's kind of at the other extreme of the scale. When we were just talking Spain -- well, when we talk Indonesia, we talk about everything on the other side there.

Jonathan Leinster - UBS Investment Bank, Research Division

Lastly, in Korea, obviously, you put the prices up in February and the impact seems to be a 5% drop in market shares. Are you surprised by the speed of reaction of the consumer in Korea and the sort of your loss of the market share quite so quickly? And do you know if that's gone to other premium brands? Or has that caused the market to trade down? Have they switched to cheap brands?

Hermann G. Waldemer

No. Essentially, I mean, the beneficiary in terms of share was, of course, the company that has not raised the prices. The only company that has not raised prices, KT&G. That was combined by a fairly bizarre consumer campaign on their side, highlighting the difference between the foreigners and the Koreans, and that was the impact. But that stuff, at the end of the day, is an impact. At the moment, we are back now to a more normal situation going forward. And the underlying trend that the Korean consumer prefers international products over Korean products, that has not changed because of those events.

Jonathan Leinster - UBS Investment Bank, Research Division

Right, so I say, so the market's basically just traded down on the back of that?

Hermann G. Waldemer

It really is.

Operator

Your next question comes from Jon Fell of Deutsche Bank.

Jonathan P. Fell - Deutsche Bank AG, Research Division

First of all, on Latin America, slightly subdued underlying EBIT growth of 4%, considering revenues were up 5%. I'm just wondering if you could talk us through that a bit. I think the statement referred to organization -- or reorganization in Venezuela and Colombia, is that a short-term thing? Or is that going to have an impact later in the year? And then secondly, could you just update us on where we are with the various challenges to plain packaging in Australia in particular? I'm wondering when we might get a result from the hearing that's just closed.

Hermann G. Waldemer

So Latin America first. Well, yes, we have -- we are in the process of closing the costly plant that we have in Venezuela. That's correct. Then some organizational adjustments and stuff that we had also in Columbia -- salary impact there. And we are in the process of discussing our plans in Mexico with the employees' representatives. So that's really what's going on there. On the cost side, this is ongoing management of our business. This is nothing an underlying cost increase that will be there now or forever. Moving over to the plain packaging situation, yes, the hearings in Australia in front of the High Court have been finalized to date. The court has reserved the matter for judgment. So I would expect a decision from the High Court in Australia in the first quarter. But as you rightly say, this is not the only legal avenue. There are 3 legal avenues and 3 proceedings out there, the second one being the claim that Philip Morris has under that bilateral investment treaty between Hong Kong and Australia. There, the situation is that the first 2 judges on that panel have been selected, i.e., the judge that we select and the one that the government selects. Now those 2 judges are in the process to select the third arbitrator and judge for the panel. We expect that to happen sometime now in April or in May. So I would expect the first procedural hearings in that case in June. But as we always said, don't expect rapid judgment. This is a process that's going to take from there at least another 2 years. The third avenue is a legal proceeding between governments, i.e., the proceedings under WTO. So the first 2 countries that have started proceedings under those rules are Honduras and the Ukraine. I would -- we would expect actually more countries later in the process to join that effort. Again, however, a process that is not going to last just a couple of months. These are longer processes, but promising legal avenues.

Operator

Your next question comes from Chris Ferrara of Bank of America.

Christopher Ferrara - BofA Merrill Lynch, Research Division

I guess, Hermann, it looks like in this quarter, I guess the mix impact to revenue was negative, not to margin but to revenue, was negative for the first time in a little while. And you're talking a lot about trade up. I guess, can you talk about what would have driven that mix impact to the top line, just so I could understand it more clearly? And I guess the difference between to the top line impact versus the margin impact because obviously, one is a profitability thing and one is a price per pack thing. But can you just talk about the interplay between those 2?

Hermann G. Waldemer

Well, there must be a misunderstanding, quite frankly. Because in the quarter, our pricing variance is $369 million and the volume mix impact is a positive $224 million, actually adding up to $593 million, almost $600 million, i.e., an increase of more than $300 million versus first quarter of 2011.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Right, and I guess that's the volume mix? I guess, I'm just talking about the overall -- the mix impact, the revenue mix impact. I guess I'll take that one offline. It might be my misunderstanding. And then I guess another one on the rate of profitability increase in Asia, the margins, they jumped pretty nicely in a quarter where average pricing has been going up in that market. This quarter wasn't a particularly large increase in pricing in Asia relative to others. Could you just give a little more clarity on why the margins jumped so nicely in Asia this quarter?

Hermann G. Waldemer

Well, this is -- of course, this is a number of markets. This is many markets. This is Indonesia we talked about before. This is Korea. These are price changes in many markets. It's just, I mean, on a quarter-to-quarter, sometimes, they can be just timing, which quarter comes first. But there is nothing really unusual. We don't -- we take the pricing as we deem appropriate, but no, there's no specific trend out there that I could see.

Operator

Your next question comes from Erik Bloomquist of Berenberg Bank.

Erik A. Bloomquist - Berenberg Bank, Research Division

Just one question on Turkey. It looks like the markets were -- you reported quite robust in the overall market, up 3%. I wonder if we can expect those to continue to recover. And particularly, given what you're suggesting with tax structure reform, does that bode well not only for the market, but then I would think particularly for Philip Morris?

Hermann G. Waldemer

I would say it bodes well also for the Turkish government. Such change is clearly in the interest of the government. Overall, I mean, Turkey, as a country, has a good economic outlook. Turkey has shown us often in the past that, yes, it's volatile, it's often steeper on the way down, but it's also definitely steeper on the way up. I think that's what we'll see again. We'll see a situation there of a GDP growth expectation of 4%. So things are going pretty well. And coming -- when it comes to us, well, we have a superb portfolio. This is Parliament. This is Marlboro. This is Muratti. This is Lark. This is L&M. This is Bond Street. We cover the entire range. And that's really, I would say, the secret behind our success in that market that we welcome a change in the excise structure. Of course, we do, and as you know, we have been working with the government on that. And now, as I said earlier, so the government has declared their intention to provide changes whilst the nature and the extent of the change, the timing of the changes is still open. Take it altogether, certainly positive dynamics for the Turkish market.

Operator

Your next question comes from Ann Gurkin of Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

I wanted to return to the discussion about pricing and pricing you realized in the first quarter and what we know about potential excise taxes in different markets. Is there any change to expected contribution from pricing for the year in your numbers?

Hermann G. Waldemer

No. I mean, our plans for the year have remained the same. Obviously, I will not divulge what our plans are going forward. But look back to the last 3 years, 4 years, and you can see that pricing has been a constant factor and has been an important factor in our growth over those years and continues to be, and honestly, always will continue to be.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay, and then if I could also ask you about the U.K.'s review of standardized packaging, any comments you can make on that?

Hermann G. Waldemer

Yes, well, the U.K. has actually announced at the beginning of this week that they'll start a consultation period lasting 12 weeks. As you know, they have done the very same thing 2.5 years ago. The government has clearly stated that they want to listen to the public views, that they want to consider the legal implication, that they want to consider potential cost to retailer and the impact on demand for smuggled and counterfeit cigarettes. We will participate, of course, in that consultation. We will show that there is no credible evidence that plain packaging will reduce smoking rates, and that on the contrary, that plain packaging has serious adverse consequences, including an increase in black market for counterfeit and smuggled cigarettes. And those markets are run by criminals. So on the basis of the same facts, then 2.5, 3 years ago, I would hope and expect that the government comes to the same conclusion.

Operator

Your next question comes from Michael Lavery of CLSA.

Michael Lavery - Credit Agricole Securities (USA) Inc., Research Division

I was wondering if you could talk a little bit about the Marlboro brand and specifically, how you think about it globally versus in any one given country. It's certainly got some struggles in Russia. How critical is it to turn it around there? And if your portfolio is growing in total, does Marlboro need to be a bigger piece of that for you to consider that a successful market for you?

Hermann G. Waldemer

Well, Marlboro is tremendously successful in many, many places around the world, and it has been growing also in this quarter it's volume quite a bit. That being said, well, the world is never really perfect and we are always open as well about disclosing that we are not happy with the situation of Marlboro. Russia would be the one place. We are just too competitive and ambitious people to accept that Marlboro will stay on a 2% share in the big Russian market. Marlboro can do more and this is why we put the resources behind, the creativity behind. This is about marketing. This is about sales. This is about retail. This is about products also and product innovation for the Russian market. So we are investing because we want to improve the situation. Another markets where the situation on Marlboro has been difficult over the years is the German market, where Marlboro, essentially today, is the only premium brand left because everybody else has repositioned to the low end of the market. However, that being said, low in Germany means $0.50, $0.60 below the premium pricing. This is, therefore, not a price problem. It's an equity problem. And here again, in Marlboro -- for Marlboro in Germany, we have there worked on the campaign, the new "Be Marlboro, Don't Be A Maybe" campaign, which is showing strong signs of really -- of success there and is improving quite a bit the smoker share amongst the 18- to 24-year-old. Innovation that we have brought to the brand has helped enormously. They actually stand in Q1 for 10% of the total volume of Marlboro. So you see, we are tackling it from all ends, but it is important to remember that whilst there are places here and there that our performance can be improved and we are working to improve it, if you put it on a global scale, then Marlboro is doing very, very well. And it's doing extremely well in the most important Asian markets.

Michael Lavery - Credit Agricole Securities (USA) Inc., Research Division

That's helpful. And then just going back to one comment you made on Korea. Obviously, there's a consumer sort of transition period to get used to the new prices, but you had said something about how it seems like it's already back to normal. Have you already seen some share come back? Or did you just mean that the competitive dynamics have sort of reset wherein that can continue from here?

Hermann G. Waldemer

No. I think the share losses have occurred, come back, not yet. I was just saying that at the end of the day, the competition in Korea will be amongst brands, and we certainly have the stronger brands in this market compared to a local competitor there.

Michael Lavery - Credit Agricole Securities (USA) Inc., Research Division

Okay, and then lastly just on tax, it looks like the rate was a little bit higher this quarter than it's been running. Is that something that will wiggle back down a little bit? Or do you think this year's rate may just be higher in general? What kind of outlook should we expect there?

Hermann G. Waldemer

The quarterly rate is our projection for the full year.

Operator

Your next question comes from Thilo Wrede of Jefferies.

Thilo Wrede - Jefferies & Company, Inc., Research Division

I only have one quick question for you. I noticed that in your -- in the press release on the country by country discussion, you started breaking out the Philip Morris brand in many more countries. Is that a brand that is getting more attention from you? What's behind that?

Hermann G. Waldemer

No, I mean, Philip Morris as a brand has always been one of our core international brands. It is just, if you like, the brand that we have selected to address the -- our underrepresentation in the low-price international segment in Italy. So I mean, it has always been a very strong brand, for example, in Argentina. It has always been a strong and growing brand over the last 10 years, I would already say, in France. No, it's just one of our top brands, but there is nothing. There is no underlying change in the way we look at it.

Operator

Your next question comes from Thomas Russo of Gardner Russo and Gardner.

Thomas Adrian Russo - Gardner Russo & Gardner

You mentioned that -- I have 2 quick questions. You mentioned that Egypt stumbled based on an increase in illicit trade. I'm curious about the sort of magnitude of that and where it's coming from. You've done such a good job stamping it out in other parts of the world. Where is it coming into in Egypt then? And secondly, can you update us on your sense of your capacity to reinvest? You mentioned that you're directing more money towards Indonesia and the Philippines. I'm wondering about other markets and also the new product work that you're doing. What does the uptick in prospects for regions and new products suggest that you'll be able to deploy in capital going forward versus what you once thought?

Hermann G. Waldemer

Okay. I mean, Egypt has just a really -- a recent surge in illicit trade. There wasn't too much in the market before. The estimate, but there's a pure estimate. Now I said it probably has already reached about 20% of consumers [ph] in Egypt growing. It is actually eating primarily into the international brands, not really in Cleopatra, which is the low-price Egyptian brand. Well, quite frankly, that's a question of enforcement and capability to enforce their -- this is a difficult situation these days in Egypt. Then in terms of capacity to invest, is there your question really on the CapEx side?

Thomas Adrian Russo - Gardner Russo & Gardner

Yes, absolutely. Yes.

Hermann G. Waldemer

Of the CapEx side, okay.

Thomas Adrian Russo - Gardner Russo & Gardner

Putting out long-term capital behind the rising prospects of geographies for you and also the possible prospects for new product launches and the acceptance thereof?

Hermann G. Waldemer

I mean, in terms of really -- of CapEx, we have not changed really our multi-year average that CapEx should be in the 1:1 ratio in relation to depreciation and amortization. From 1 year to the next there can be above and then a little bit below. The average will be there. I mean, in terms of big categories where we invest, that would be super high-speed machinery. There is machinery today that can produce 20,000 cigarettes a minute. Then of course, in the important Indonesian market, that would be the capacity increase that we have there. Then we are in the process of finalizing the greenfield factory in Korea. We are investing in Korea. So the secondary is up and running. Primarily will be running in July, August of this year. In the Philippines, we do the factory upgrades following the business combination there. So it's ongoing. In terms of other investment for innovative products, as you know very well, the margin dynamics of this industry, if you really have a seller, the investment on CapEx is amortized pretty quickly.

Thomas Adrian Russo - Gardner Russo & Gardner

Yes. Last thing, Hermann, can you share with us in this low-rate environment what have been your best terms? Or is it common about an extraordinary low rate pay for some meaningful amount of borrowings? What is the high watermark issuance at the moment?

Hermann G. Waldemer

I mean, yes, you're right, I mean, in March, we actually issued $1.25 billion of bonds, $550 million with a 5-year tenure at 1.625%. And we actually issued also a 30-year bond for $700 million at 4.5%. So as you can see, again, we think also long-term and not just short-term benefit, i.e., we have increased the time, the duration of our outstanding debt. In terms of total cost of debt, the year-to-date number would be 4.2%. It has been 5% in the year 2010. It has been 4.4% in the year 2011, i.e., it keeps on coming down.

Operator

Your final question comes from the line of Priya Ohri-Gupta of Barclays.

Priya Ohri-Gupta - Barclays Capital, Research Division

I just have a very quick question around your short-term borrowing balance. It looked like it spiked up pretty significantly in the quarter despite some of the longer term issuance that you did. Could you just speak to sort of what the moving pieces were there?

Hermann G. Waldemer

Well, I mean, essentially, as you said, this is short term. We are able to borrow at extremely favorable rates on the commercial paper market. That was actually a $3.7 billion at 20 basis point average by the way, 20 basis point average at month's end. This fluctuates. So the year-to-date average would be already $1 billion less, would be $2.7 billion. But last year's average was -- the full year average was $1.9 billion. So you will always have fluctuations there. But in terms of overall financing, really, the basic principles and the cornerstones around it have not changed, the most important being that we want to be comfortably in the middle of a single A credit rating.

Operator

And that was our final question. Sir, do have any closing remarks?

Nicholas Rolli

Okay, I just want to thank everyone for joining us today on the call. If you have any follow-up questions, you can contact the Investor Relations team. We're based here in Lausanne this quarter. So thank you all, and have a great day.

Operator

Thank you for joining the Philip Morris International First Quarter 2012 Earnings Conference Call. You may disconnect your lines at this time, and have a wonderful day.

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