Operator: Good day, and welcome to the Philip Morris International Second Quarter 2013 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session. Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community.
I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, Sir.
Nicholas Rolli - VP, IR and Financial Communications: Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2013 second quarter results. You may access the release on our website at www.pmi.com.
During our call, we will be talking about results for the second quarter of 2013 and comparing them to the same period in 2012 unless otherwise stated. References to volumes are to PMI shipments, industry volume, and market shares are the latest data available from a number of internal and external sources. Organic volume refers to volume excluding acquisitions; net revenues exclude excise taxes.
Operating companies income or OCI is defined as operating income before general corporate expenses and the amortization of intangibles. You'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 back of this presentation, which is also posted on our website.
Today’s remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today’s presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements.
It’s now my pleasure to introduce Jacek Olczak, our Chief Financial Officer.
Jacek Olczak - CFO: Thank you, Nick, and welcome ladies and gentlemen. As previously foreseen, we had a challenging second quarter. Our adjusted diluted EPS was up slightly, excluding currency. Cigarette volume declined by 3.9%, due principally to lower industry volume in the EU region, Russia, Turkey and the Philippines, as well as inventory movements in Japan and Russia.
Pricing remained strong and we had solid share gains, particularly in the EU region. However, these were not sufficient to offset the impact of unfavorable volume/mix, additional investments, notably in Indonesia, the Philippines and Russia, and higher clove and tobacco costs in Indonesia.
Our business fundamentals remain solid and we are confident in our ability to achieve the ex-currency guidance that we established in February and re-affirmed in May. However, the evolution of tax-paid cigarette industry volume will remain a key variable and our main challenge for the remainder of the year, notably due to the growth of illicit trade.
We anticipate better results during the second half of the year and in particular a strong fourth quarter. This is based on the expectation that our volume declines will moderate as adult smokers adjust to the higher prices implemented earlier this year, our strong market share performance in the EU will continue, margins will improve thanks to recent price increases, and we will have favorability with respect to the timing of investments in infrastructure and marketing.
Since April, we have witnessed a sharp decline in the value of certain currencies relating to commodities and emerging markets, such as the Australian Dollar, Indonesian Rupiah, Mexican Peso, Russian Ruble and Turkish Lira. Accordingly, at prevailing exchange rates, our guidance now includes a full year unfavorable currency impact of approximately $0.31 per share versus $0.19 in our previous guidance.
Our revised reported diluted EPS guidance for 2013 is therefore $5.43 to $5.53, compared to $5.17 in 2012, the change solely reflecting the currency impact. Excluding currency, this continues to represent a growth rate of approximately 10% to 12%, compared to our adjusted diluted EPS of $5.22 in 2012. This is in line with our mid to long-term currency-neutral annual adjusted diluted EPS growth target
Let me now discuss our second quarter results in more detail. Our cigarette volume was down by 2.6%, excluding the Philippines. This reflects three main factors. First, cigarette industry volume in the EU Region continued to decline. Second, industry volume in Russia was impacted by the large tax-driven price increases that were implemented at the beginning of this year, as well as a weakening economy. Third, our second quarter volume reflected a difficult comparison due to the inventory replenishment in Japan in Q2 of 2012, as well as a lower market share.
There were, however, some favorable developments. First, the decline in our volume in the EU region of 5.9% was significantly less than the 10.1% decline that occurred in the first quarter. Second, we again achieved volume growth in the Asia region, excluding the Philippines.
Finally, volume growth continued to be strong in the Middle East and North Africa. Pricing continued to be the key driver of our income performance. It helped to offset the impact of unfavorable volume/mix on net revenues, excluding currency.
However, adjusted OCI declined by 3.4%, excluding currency. This was due to unfavorable volume/mix, higher production costs, notably in Indonesia where higher clove and tobacco costs have to-date only been partially passed on, investments in business infrastructure and marketing in Russia since the second half of last year, and additional spending in the Philippines in the second quarter of this year to seek to achieve more sustainable price gaps.
Our ability to take pricing remained solid, including in the EU Region. During the second quarter, we achieved a favorable pricing variance of $499 million, bringing our June year-to-date total variance to over $1 billion.
In May, we increased retail prices in Germany by EUR0.20 per pack across our portfolio. In June, we announced a further price increase in Russia of four rubles per pack across most of our key brands. We have also increased prices recently in Belgium, Canada, Egypt, France, Greece, Indonesia, Spain, Switzerland and Ukraine.
These price increases will help us achieve another strong pricing variance during the second half of the year. Let me now review a number of our key geographies, starting with the EU Region.
We have seen some signals that politicians recognize that further spending cuts to try to rein in budget deficits are not going to help Europe turn the corner. However, few concrete measures have been taken so far to stem the continued rise in unemployment, which reached a seasonally adjusted rate of 12.2% in the EU in May this year, this is compared to 11.3% a year ago.
In the second quarter, original cigarette industry volume was down by 8% and the regional fine cut industry volume declined by 0.8%. During the quarter, we witnessed continued adult consumer down-trading to lower-priced products, including illicit cigarettes.
Due to the continued deterioration in the economic situation and the resulting growth in illicit products, we are now forecasting a decline of cigarette industry volume in the EU region of 7% to 8% for the full year 2013, compared to our previous forecast of around 6.5%.
While industry volume declined slightly faster than previously foreseen, we were able to achieve a better than expected market share. Consequently, our cigarette volume declined by 5.9% and our fine cut volume grew by 4.3% during the second quarter.
On a regional basis, our cigarette market share increased by 0.7 points in the second quarter to 39.3%. The gain was driven in particular by Marlboro, which grew by 0.5 points to 19.4%, with L&M, Chesterfield and the Philip Morris brand also performing well.
In the fine cut category, we gained 1.2 share points to reach a regional share of 14.9%, as we continued to successfully extend our cigarette portfolio into this category.
Let me focus on three of the key markets in the EU region, namely Germany, Italy and Spain. Cigarette industry volume in Germany declined by 7% in the second quarter and fine cut industry volume decreased by 0.7% following price increases in March. However, it should be highlighted that the underlying decline in cigarette industry volume was 2.8% after the elimination of estimated trade inventory fluctuations.
Our cigarette share grew by 1.2 points in the quarter to 37.6%, driven mainly by the strong performance of Marlboro, which achieved its fifth consecutive quarterly year-on-year share increase.
The economic downturn in Italy continues with unemployment increasing from 11.9% in February to 12.2% in May. Italian cigarette industry volume declined by 7.2% in the second quarter and a fine cut industry volume was down by 10.5%, impacted by the reduction in the price gaps between fine cut products and cigarettes that followed the large fine cut tax increases mid last year.
The underlying fundamentals of our business in Italy remain strong. Our cigarette market share grew by a further 0.4 points in the quarter to 53.3%, thanks to the continued momentum of Marlboro and the success of the Philip Morris Selection in the international low-price segment.
We also gained share in the fine cut category, with an increase of 7.9 points in the second quarter to 37.9% following the successful introduction of Marlboro fine cut. We were encouraged by the decision of the Italian Government to postpone to October the one point increase in VAT that was due to be implemented in July. We believe that such a measure would reduce consumer spending and hope that it will be further postponed or cancelled.
At the end of last month, the Spanish Government modified the excise tax on tobacco products in order to enhance the predictability and stability of excise tax revenues, which had been undermined by adult cigarette smokers down-trading to lower-taxed alternatives. The specific excise tax on cigarettes was increased while the ad-valorem rate was reduced. At the same time, the relative excise tax burden on fine cut was increased.
The resulting reduction in the price gap between cigarettes and fine cut should help address the recent market imbalance whereby cigarette industry volume declined by 12% in the first half of the year, while fine cut industry volume increased by 26.4%. Our cigarette market share was up by 2.3 points in the quarter to 31.9% as Marlboro, Chesterfield and L&M all grew.
Let me now turn to the EEMA markets, starting with Russia. In Russia, we estimate that cigarette industry volume declined by about 6.4% during the second quarter, as adult smokers reacted to tax-driven price increases of 6 rubles to 7 rubles, equivalent to 9% for above-premium to 22% for super-low price brands, and to a weaker economy.
Our volume declined by 11.4% during the same period as our distributor reversed its first quarter inventory build-up.
Through the end of May, our quarterly market share remained resilient and was just 0.2 points lower at 25.9%, despite delayed price increases by several competitors following the January tax increase. Parliament, L&M and Bond Street continued to gain share, but this was more than offset by the decline of Chesterfield.
We expect higher profitability for the full year 2013 than last year due to our pricing strategy. So we are forecasting that cigarette industry volume will decline 6% to 7% on a full year basis.
In Turkey, there was a resurgence of illicit trade during the second quarter, when it reached over 20% of total consumption due to the government's focus on other priorities. As a result, cigarette industry volume declined by an estimated 11%. It is difficult to forecast the full year performance due to the uncertainty surrounding future trends in illicit trade. However, unless the government acts quickly to address this issue, cigarette industry volume could be down by as much as 7% to 9%.
The premium and mid-price segments continued to perform well. Our mix improved, driven by the strong momentum of Parliament and Muratti. However, the low-price segment, which includes Lark and L&M priced at 6.50 Turkish Lira per pack, was impacted by the expansion of the super-low 6.00 Lira per pack segment. This led to a slight erosion of our overall market share in the second quarter through May of 0.5 points to 44.8%. We have addressed this issue through the re-launch of Chesterfield at 6.00 Lira per pack.
In Asia, we are continuing to strengthen our business, despite the disruptive tax increase in the Philippines. Our cigarette volume grew by 1.5%, excluding the Philippines, with Indonesia the key contributor.
In Japan, cigarette industry volume decreased by 2.0% during the second quarter and we continue to forecast a similar decline for the full year. However, due mainly to the inventory replenishment that occurred in Q2 of 2012, our volume was 10.2% lower than this year.
During the second quarter, we witnessed continued intense competitive activities and the successful launch by Japan Tobacco of its first Mevius capsule variants. Our market share declined by 0.9 points to 26.9%, driven by lower shares for Lark, the Philip Morris brand, and primarily the menthol variants of Marlboro.
We expect our market share to remain under pressure in the second half of the year, so we believe that we will make progress over time thanks to the continued resilience of Marlboro and a strong pipeline of innovative new products.
Indonesian industry volume grew by 3.5% in the second quarter, while we outperformed the industry with a volume expansion of 6%. For the full year, we now expect an industry growth rate of approximately 4%, which, while below the exceptional growth rates of the last two years, is consistent with the historical average for the market.
Our market share grew by 0.9 points to 36.1%, driven by Sampoerna A, U Mild and Marlboro, partly offset by the decline of Dji Sam Soe, which moved above the favorable (1,000 rupiah) per cigarette, or 'stick', price point. Premium Sampoerna A is the clear leader in the growing, but increasingly price-competitive LTN machine-made kretek segment, U Mild is the leading mid-price brand in this segment, while Marlboro continued to strengthen its position in the 'white' cigarette segment, where it reached a segment share of 76% during the second quarter.
The final market that I will cover is the Philippines. The decline in the tax-paid industry volume moderated significantly during the second quarter with volume down by 7% despite the continued high prevalence of local non-tax-paid cigarettes that are not included in the data.
We increased our investments behind Fortune and lower-priced brands to seek to achieve more sustainable price gaps. However, despite the very large tax increase, a local competitor's Mighty and Marvel brands have remained at last year's attractive price point of 1 peso per stick. This gives the competitor a clear price advantage in a market where stick sales account for about 70% of the volume.
With only limited improvements in tax enforcement, the widespread availability of non-tax-paid domestic cigarettes remains a critical issue. It is driving a greater level of down-trading than originally foreseen and is impacting our volume, our mix and our market share, which declined to 82.9% in the quarter. We are continuing to work with the Bureau of Internal Revenue to achieve a level playing field.
Our volume increased from 13.5 billion units in the first quarter to 19.1 billion units in the second quarter. For the full year 2013, we forecast that our volume will be down around 20% to 25%, but that the decline in consumption should be significantly less.
In conclusion, we remain confident that we will deliver solid financial results in 2013. Industry volumes remain the key challenge. However, we expect to continue to achieve solid market shares, as well as higher prices.
There is no change to our guidance attributable to business regions. Our revised 2013 reported diluted EPS guidance, reflecting prevailing exchange rates, is $5.43 to $5.53. Our guidance continues to represent the full year growth rate of approximately 10% to 12%, excluding currency, compared to our 2012 adjusted diluted EPS of $5.22.
We anticipate strong free cash flow growth, excluding currency in 2013 and remain steadfast in our commitment to reward our shareholders through attractive dividends and substantial share repurchase programs.
Our dividend yield last Friday was 3.8% and our target dividend payout ratio remains 65%. During the second quarter, we spent $1.5 billion in share repurchases and have now repurchased close to 25% of the shares outstanding at the time of the spin.
Thank you. I will now be happy to answer your questions.
Operator: Bonnie Herzog, Wells Fargo.
Bonnie Herzog - Wells Fargo: Jacek, I guess my first question is in terms of the quarter, where did it fall relative to your expectation? I'm curious since your volume and overall business has to improve quite substantially to hit even the low end of your 10% to 12% currency neutral EPS growth, what gives you the confidence that you can hit these targets and then one of the key drivers of this?
Jacek Olczak - CFO: Well, to start with the quarter, second quarter, I mean nothing, frankly speaking, came in the second quarter as a surprise to us. I mean, we knew that we will have an inventory adjustment in Japan, and maybe at this stage, I can give you a little bit more details over the (indiscernible) of that adjustment. If our shipment was down in Japan by about 10%, if you take the market decline down, it's about 8%. So on shipment you're talking well around $1 billion of the adjustments or around $1 billion of adjustments. You know that Japan is a pretty profitable market to us as the volumes are expensive. In Asia, we also knew that we're going to scale up the investment behind the tune of defending the price points in Philippines for just these two countries to market, put the drag on the results but as expected. I mean we knew it. As a surprise I think came a bit weak start in June in Japan and I think the sudden resurgence of the illicit trade in Turkey. I mean it is where the things were at the beginning of the quarter, where we have been heading in our market. When it comes to the second half of the year, as you have seen, we had a very strong pricing in the first half of the year, $1 billion, I mean it's clearly gives us and the pricing is, pricing environment supported by the tax environment, that means we feel pretty comfortable about the delivering of strong pricing in the second half of the year. Second thing is – those just the timing of the annualization of our investment from last year to this year. If you look at our total cost variance, which you'll have on the cost of goods sold and the total cost of the company, essentially the negative variance which we have for the first six half of the year that is for the year. So in second half of the year, we should be essentially closing flat versus 2012. So as I said we have a strong pricing, the tax environment is reasonable, the cost comps is going to be to definitely easier for the second half of the year and needless to say that the business performance, you know measured by the performance of our brands in essentially most of the geographies. I mean we're doing pretty well. So this gives us a confidence that we can deliver the result for the full year.
Bonnie Herzog - Wells Fargo: That was really helpful. I appreciate that. As you mentioned pricing has been strong and you expect that to continue in the second half is, so I'm trying to understand, how your volume could be impacted for the second half and the full year. You suggested that last quarter that your volume growth ex-Philippines would be positive this year. I'd like to know if you think that still possible given again how weak the volume has been, last quarter and this quarter and then certainly especially given the Marlboro volume.
Jacek Olczak - CFO: Sequentially, we see the improvement in the volumes in the most of the geography. So when we're revising the guidance the outlook for the full year is much more to recognize that some of this improvements are not as growth as maybe initially we expected, but there are improvement. So clearly, the volumes of both the quarter three and quarter four, I mean, it's going to look a little bit better. But clearly the total market volumes, I mean, for us is a key challenge for the year. I think maybe what will help you, if you look at how we see ourselves, how we are going to do in the quarters Q3 and Q4, and you know that this is our practice not to give any specific guidance for the quarters, I would expect the EPS level for quarter three to be somehow comparable to what we had in the quarter one and then we will have all alignment of that revenue and the cost comps fully materializing at the back end of the year.
Operator: David Adelman, Morgan Stanley.
David Adelman - Morgan Stanley: Just to be clear on that last point, do you think you're going to have an absolute level of earnings per share in the third quarter that's comparable to what you earned in the first quarter of this year?
Jacek Olczak - CFO: Well, I said that in our practices and this is what I said to (Bonnie), as our practice is not to be very specific on the guidance on a consolidated basis. I was just trying to give – there is no (indiscernible) a little bit of color on what will be the pricing of the growth. On ex-currency basis, my EPS in Q3 growth rate should be comparable, might be slightly above what I said in Q1. So, clearly, you see…
David Adelman - Morgan Stanley: A comparable growth rate, not a comparable level of earnings, just to be.
Jacek Olczak - CFO: Yes. That's correct.
David Adelman - Morgan Stanley: Can you help us understand sort of the magnitude of the change in the enforcement of the non-duty paid volumes in the Philippines? In other words, if it started and the level of enforcement was at a zero and a 100 is sort of standard and optimal, where are we as we are going through month-by-month?
Jacek Olczak - CFO: Well, the 100 last year, I have to – I think, start of the last year, I think the last year the (underdeclaration) from that particular competitor, we estimate we are in the range of 80% of the entire volume. We brought it down of the government, somehow brought it down to say about 20%, 25% under declaration, but just the magnitude of the tax burden which is at the new rate is that you still kind of sell the product profitably if you declare 75% of the volume and under declare 25%. So the issue is now and therefore it's presumably that particular competitor still is sitting on a 1 peso price point, which you know if you pay the full tax, economically it is completely not doable. So, the question is now, will the government continue, will there be enough willingness on the government side to make sure that 100% of the volumes are being declared as is my case and some other competitors in the market. So that's the magnitude. So, yes, there is an improvement. We are about to reach the tipping point in the Philippines, but we have not reached the tipping point. Any sort of a relaxation, if you like, on a tax collection, tax administration from the government and we might be going back to square one.
David Adelman - Morgan Stanley: As it does improve the hope and expectation would be you'd in effect buy down Fortune at a lower rate, correct, and improve the profitability in the market?
Jacek Olczak - CFO: Yes, and this is what I referred to, with our increased spending in Q2 which is going to continue into Q4 behind Fortune is the buying down the price that results. So this is sales (indiscernible) in other forms of supporting the brand to bring it closer to this idea, the price of say (150, 160) and the same time we have re-introduced two brands at the 1 peso territory. This should clearly put the pressure on our financials you can imagine. What we are doing is – our strategy was two-pronged strategy bring down the price bundle as the volumes, and in the meantime, work with the government, so they bring up the bottom of the market, but making sure that everyone pays taxes. Now, we have been delivering pretty well on our part, but I have to admit, it is financially expensive strategy, but we also have to make sure that the government delivers on the second part of the strategy. Just two things have to work in sync otherwise we will have to integrate.
David Adelman - Morgan Stanley: Last quarter Jacek on cash flow, you reiterated again, you expect a strong increase in free cash flow for the year, it was down in the first quarter versus the year ago first quarter, you mentioned on the last conference call that had to do with the phasing of the repatriation of profits to the United States and the related tax issue paid, but it's down again even on a currency neutral basis in the second quarter, what, why?
Jacek Olczak - CFO: There is nothing structural, it's just the timing of income, foreign income tax payments in our attribute, and we just headed in the second quarter. I think as of quarter three, quarter four; you will see that these things will level out. So, what we initially said is still valid that we expect the free cash flow to grow faster than earnings for this year.
David Adelman - Morgan Stanley: Actually Jacek, one last thing do you feel -- the growth of illicit trade that you mentioned in the number of markets, do you think is that getting to a point where it's perhaps inhibiting or will inhibit your future capacity to take pricing?
Jacek Olczak - CFO: Not really, as you could see, we had a very strong pricing first half of the year. We expect the strong pricing second half of the year. So, it's not there. I think what is more behind the illicit trade is not just the pricing, which we are taking, but the whole macro situation. The pricing without the erosion of the consumer purchasing power is one impact and the pricing, where you have erosion of the consumer purchasing power is the other impact. I think (EU) is exactly that sort of a situation that the pricing is pretty moderate as is the tax environment; so that's good on that side, but if you have a continuous growth of unemployment, various austerity measures, et cetera, I mean it puts the dent on the consumer spending. Russia is, frankly, speaking also like this. You have a reduction of the increases of managed utilities in Russia are well above inflation, well above the rate of the increases last year, because utilities in Russia went up by about 10% in the first half of the year; last year was only 5%. Pricing, yes, it is pretty high pricing, but we know we had to pass on the prices and obviously improve our margins. So, therefore, we see a little bit of a softness in the market, but it is not the pricing, it is much more than macro, (the illicit) – the unemployment and other governmental measures to improve the state deficit.
Operator: Judy Hong, Goldman Sachs.
Judy Hong - Goldman Sachs: Just a couple of questions from my end. First, just, I'm looking at your Asia margins and, clearly, you had a pretty significant decline in Q2, and I know that there are sort of big buckets of the drivers of the margin decline. You had the negative geographic mix with Japan being down 10%. You have the Indonesia margin pressure from higher cost, and then you've got the Philippines step up in the investment. But I wanted to just see if you can actually quantify sort of thinking about these big buckets, how orders – can you quantify the drivers of the margin decline in Asia?
Jacek Olczak - CFO: Well, I think you pointed them all. I mean is the Japan, which is more one-off in the quarter, and I said that the margin instead of adjustment in inventories – you know you're talking in the 1 billion, billion times the margins which we had in Japan, that's clearly put the dent on the performance of the region and the spending in Philippines. This is working on the putting pressure on the cost. Now Indonesia is still -- about this time, Indonesia is in the situations when we fully passed on the (tax) plus also we had a lap on the clove prices and the leaf prices. So the pressure is being released from Indonesia. Japan, as I said was one-off. Philippines is going to continue. All in all, actually, (Judy), I think Asia is going to have a -- we expect Asia to have a nice growth of the margins, strong growth of margin actually in the second half of the year as our all the regions PMI. We expect for the full year that the operating margin for entire PMI will be up versus last year. So we expect the margin growth on the total PMI and as I said the second half of the year, you should see the improvement in all our regions.
Judy Hong - Goldman Sachs: So when you think about Japan and then outside of Japan in Asia, so is Japan margins down also because you're spending more given the competitive pressure and outside of Japan is the Philippines really the only region where you're seeing – at just the country level, the margins being down year-over-year?
Jacek Olczak - CFO: No, I think it's more to the shipment distortions which I had in Japan, though as we continue spending in Japan, we're launching our products. So there is (indiscernible), but this is more due to the one-off inventories and Philippines which is support of the Fortune and our lower price (indiscernible) to defend price points. So these are two items which essentially drive the margins in the second quarter of Asia region.
Judy Hong - Goldman Sachs: Just on Japan, so it sounds like they're not expecting much of a market share improvement in the back half of the year, even though you have stepped up a bit of a spending in that market. Can you just talk about sort of what you're seeing competitively? It sounds like really the intent competitive situation continued in the second quarter. Do you think that just from a new product perspective, you don't have enough to really deal with some of the competitive pressure? I'm just curious why you think that the market share doesn't necessarily get better in the back half?
Jacek Olczak - CFO: Well, I mean as JT continues with the promotional spending under new protocol for (income figured), especially the re-grading of our share for June, i.e., mostly attributable to the successful affect to revenue that was initially free product variance, absolute product variance from my views, as you know Marlboro, Philip Morris and Marlboro was the leading of that part of the menthol segment in Japan would been very successful. So we get the lot of share in the past Mevius, so Mild Seven at that time was one of the big brands which was not participating. So the whole competition is little bit contain to the while the quarter of the market which is the menthol and we have our nice share there, we actually overrepresented in that segment. I think it's going to continue, we'll all be under pressure with share, but you know we also still have a couple of initiatives in our sleeve for the second half of the year, plus we have very good performance comparative to brands which we launch in the first half of the year. So there will be a pressure on the share back, where you lose share you can range for. So that remain optimistic.
Judy Hong - Goldman Sachs: Lastly just in Russia I think you called out some of the competitors were lagging in terms of the pricing in that market, I mean JTI pricing recently. So is your view sort of from a pricing perspective at least the competitive situation has become a little bit more rational and that it's really just more about the volume situation? Are consumers starting to react to the pricing increase in a more modest way now that you have sort of had the six months of pricing in place with the tax increase in place?
Jacek Olczak - CFO: Well, (consequently), if you look at the smoking incident and daily and maybe it's still early to read it, but we don't see much of the movement if at all, but as I said, maybe it is too early to read the impact of this price increases. Remember that Russia was taking the prices year-on-year, and every year, twice the year the prices still end up was to go up in Russia. This year is different because the size of the tax increase was larger. So obviously the price increase is much more – is larger as well. I think if I look at my portfolio that I claim was adjusted (0.2) losses, knowing that my brands lost the price gaps of 6 rubles to 7 rubles because this was the price increase from the beginning of the year versus competitors. I mean, I feel very strong about the portfolio and actually I start seeing a good payoff of the investment, which we had in Russia this year and continuing this year, because it demonstrated the strength of the portfolio (that I quoted) was temporary, but they defend to show despite the advantages of pricing. Now, you have the large Indian some other markets as well. So I don't think it's something which is systemic. It happens that somebody gets to focus on something else. For us have been very clear (whereas) Russia is getting into maturity. I mean the volumes are very exciting but we are much more exciting about growing the top line and growing the bottom line, and I think for us the focus on Russia is to generate the value out of the market over then contemplate too much a bit of a volume on markets (were noted).
Operator: Jonathan Leinster, UBS.
Jonathan Leinster - UBS: Just apologies, but going back to sort of Bonnie's question with regards to the good guidance. I think no change to the EPS guidance except currency, volumes here appear to be quite substantially worse than probably initially (formed). I mean, can I just push you, is there any sort of number you'd give full year ex the Philippines and presumably the swing factor in the second half is mentioned pricing and cost, does that mean the second quarter increase in costs in the Philippines and Indonesia sort of are dropping out again? Are you going to – is the – was the price moves on (indiscernible) in the Philippines is a temporary item or is that going to be a permanent reduction?
Jacek Olczak - CFO: Well I said on the total cost in answering one of the questions before that one the total cost for the company, the variance which we have ex-currency on the first half of the year that's essentially for the full year so – and then I will have a much better clear cost comparisons in the second half of the year. Pricing, $1 billion, I would say, we are qualified there is a strong pricing and we don't see any sort of a headwind at this stage to our pricing. I think we are going to continue with the strong pricing going forward. You have heard we have announced prices recently also in Germany, France, number of other location, so this obviously is going to help the year. Volume and total market volumes, note our performance is our market share is pretty strong and we are growing our markets (showing) a number of places, I think the single biggest challenge which we will have this year is the total market size, and this I have to admit where, as you know, there are a number of the factors which play into this one, which makes a little bit forecasting more difficult that might be in other years, but this is the year when we have significant challenges on the total market.
Jonathan Leinster - UBS: But is it fair to lay that the response to Company has been to ramp pricing probably more than they expected in the second half to offset that volume, the market volume declines?
Jacek Olczak - CFO: Yes. We always were focused on growing the revenue and the bottom line. So I think we don’t have any major switch in our – or change in our strategy.
Jonathan Leinster - UBS: Just totally a separate subject; the famous e-cigarettes, is the strategy of the (great remainder) as it was in July 2011 with a sort of very much focused on heat, not burn products rather than e-cigarettes or is that something which is flexible depending on the way the market develops?
Jacek Olczak - CFO: No, we are pretty flexible, because we said we are working on three platforms. I mean, two platforms which are based on the heat versus burn and the third platform, which is essentially one could say that versus e-cigarette. So, we are making progress on all the three. We are also watching what are the developments in the market. So I think our three platforms are assessing what we see today in a market that should be able to address all opportunities which may exist in that market.
Jonathan Leinster - UBS: Given the way in which the markets develop, would you be emphasizing more the e-cigarette now rather than heat, not burn, or has that not really changed, because originally I think couple of the first two platforms that you fully been to market were heat, not burn?
Jacek Olczak - CFO: I think e-cigarettes, as they are today, I don't think the situation has changed much with regard to our assessment as some time ago and you need to have the product which is palatable to a consumer, a product has to be liked by the consumer, I don't think in e-cigarettes today are delivering on that front. Heat versus burn clearly addresses both are the element of the hard reduction and delivers on the taste expectations of consumer. So, I think the heat versus burn in our opinion is a closure to this idea of sort of a product which you should have in the market. E-cigarette as I said, look, it is earlier -- every base of the category development, so the more focus and investment is needed in order to bring the palatability again of this product into some level of acceptance by consumers. I mean we see the e-cigarette in some markets is essentially in EU, in some markets, not in all of EU, but there is an (an lackness). It confirms that there is some needs of the consumers, but we also have to remember that the early days of the e-cigarettes are in the environment when there is no talks. So what I see in some countries is much more phenomena of the pricing rather than a phenomena of the hard reduction, okay, I mean the people are compromising, because they get a discount versus the cigarette going into 40%, 50% or 70% range. It is nothing substantial; I don't think we could call it a substantial at this stage, but it is early days of the category. So we continue working on our three platform and we are making a progress as per plan. I think when we'll be ready, we’ll go to market.
Operator: Michael Lavery, CLSA.
Michael Lavery - CLSA: Just looking at your business in Indonesia. The volume growth in the first half was about 2% if it's 4% for the year, obviously that's a pretty sharp acceleration that you would expect. I know the comps get easier, but you've also got some potential consumer headwinds with higher fuel prices and those getting pass-through to other products and then some big competitive launches. So what do you see driving an acceleration in category growth there?
Jacek Olczak - CFO: Well, we expect 4%, but one can say that, I think a quarter ago, we have been more closer to the 6% of the growth. So we lower a little bit our expectations for the market. 4% is about the historical average growth of that market, if I take out the last very exceptional, the last two years which were very exceptional. I think the fuel subsidies, I mean, a part of that thing was mitigated by the government by returning some subsidies in other forms to the lower income people. I think the opening of the year was a bit slower. 1% I think was the growth rate of the market in the first quarter. This was presumably more impacted by some spikes in the food prices in Indonesia. So I think it's a pretty doable and it actually somehow reflects the pricing of the seasonality, if you like, phasing of the development in the market. I think the 4% for the market should be delivered for the total market. Our volumes and our markets are – is pretty strong, not as strong growth as the last year, because we are leaving some attractive price points behind us. But that is still for the first half year. In the second quarter, first quarter, we had a nice share advancement. So I think we can expect some share growth, moderate share growth going forward in the year.
Michael Lavery - CLSA: Then at the category levels, is it the easier comps that are the big driver for the acceleration in the second half or is there anything else to that?
Jacek Olczak - CFO: No, I think the market is slowly going to its historical growth rate. It's just the pricing of the quarter, so okay.
Michael Lavery - CLSA: Then just for back in Japan, what you expect that's factored into your guidance? Would you need to regain share there to be on track for what you're expecting that's reflected in your guidance? Or did you have it where you just need to hold? Or I realize the pacing in this past quarter had an impact. Is your expectation that that's going to swing back? Or do you not necessarily need that to happen?
Jacek Olczak - CFO: I mean, we put it into our guidance or we included in our guidance some understanding that the share in Japan's going to be under pressure. I won't give you the number what is the exact share we're targeting for the year, but we do recognize that there was a pressure on the share, on the market share in Japan. As I said, I had still – we still have a few initiatives to be launched in the market. Let's see how the whole thing unfolds. I mean, the Q3 well presumably we'll have a better – in a better position to say what is the realistic share expectation for the full year.
Michael Lavery - CLSA: I realize it's just early in the quarter, and only just a little over a couple of weeks, but in Japan say specifically or any major markets have you seen trends so far that look like in acceleration? Or specifically in Japan, has there been from the consumer retail share trends that look more promising that suggest you're seeing the shipment share regain some account?
Jacek Olczak - CFO: No, but as I said earlier, I mean the biggest challenge which we'll have this year is where is the total market and total market you need a little bit of time to estimate properly. I mean not on the weekly basis or biweekly basis. So we're pretty confident on our share. As I said we're pretty confident about the pricing, but we will have to see how does this unfolds in the remaining two quarters of the year relative to the total market sizes. So this is what it is, but nothing at the beginning of this month, which would forecast it from a perspective that our guidance or outlook for the second half of the year would change versus what we just announced.
Operator: Christopher Growe, Stifel Nicolaus.
Christopher Growe - Stifel Nicolaus: Just two questions for you. I wanted to ask a little bit more about Europe, and just understand through the quarters, this is a better volume performance and I expected actually. It seems like you had sequentially better, given you had a pretty soft April. So the expectation where you've increased your estimate for the decline for the division for the year, do you expect conditions to worsen then in the second half of the year or remain about the same? I guess what I saw in the quarter was an improvement throughout the quarter.
Jacek Olczak - CFO: Yes, there is. I mean, we had the – total industry was, if I remember, 10% down in Q1, is 8% down, you have the blended 9.2%, 9.3% for the first half of the year. So, yes, even with our revised outlook for the full year, we do assume that there will be some improvements going forward. It is a little bit of a comps, but, yes, sequentially we see that the volumes – we had exceptional low quarter first quarter. So this is already in the books. So you can't change this one. But, yes, there were some sequential improvements in the quarter, but obviously if you look at our shipments, they've been much better than the market, because EU has delivered a fabulous market share performance first quarter and the second quarter and it's very much on the back of Marlboro. So, you remember Chris in past I said, EU is systemically much more total market is a mix problem for us. That's a part of a positive news about the EU performance this year.
Christopher Growe - Stifel Nicolaus: Just one follow-up question for you, just on the investments that you've made over the last year in Russia or in Indonesia, those kind of markets or even behind the Marlboro brand overall, we will be lapping a lot of those in the second half of the year, do you expect that those investments then are going to remain at the same level, did they start to come down on a year-over-year basis, is that a benefit in the second half or it is just less of a drag is what you said?
Jacek Olczak - CFO: No, what I'm saying is, the second half of this year is going to be more comparable to the second half of last year, therefore my variance going to be flagged, so yes on the full 12 months basis this year you will see that we have increased year-over-year however the phasing of the thing was that we started or accelerated or increased the investment in the second half, third, fourth quarter in some places of last year and therefore I'm lapping this now in the second half of this year.
Christopher Growe - Stifel Nicolaus: Did you quantify the degree of investment you've made over the last year, let's say, what your increase was overall saying in sort of marketing, distribution those kind of areas?
Jacek Olczak - CFO: Wish I could and I know the number, but I'm afraid we have so many people on our call to make (indiscernible).
Operator: Vivien Azer, Citi.
Vivien Azer - Citi: My first question has to do with Indonesia, your guidance for 4% volume growth has come down pretty sharply in just a little over a month, so what gives you comfort, the 4% is the right number to the extent that you see continued food inflation in that market?
Jacek Olczak - CFO: Well, we got the reading now of the second quarter, so yes, I mean the second quarter came nicely and the volumes grew by – total industry volumes grew by – total industry volumes grew by 3.5. Once you have the two quarters, it's a little bit easier to forecast the full year. I think there was some impact in the first quarter of the food price, food inflation. There was some flood in some regions, territories in Indonesia, I think all that together, I mean, might put the market on a bit of slower opening of this year. So, the quarter sequentially now should be better, but I think we'll – to be more realistic, we should rather put an estimate of the total market into the range of 4% rather than stayed with the previous one. Frankly speaking, 4% is a very solid, nice growth rate for this market and we're okay with this.
Vivien Azer - Citi: In the EU, you previously stated that you'd hope to hold your local currency EBIT flat with your prior volume assumption. Can you give an update on that outlook for local currency EBIT growth in the EU?
Jacek Olczak - CFO: Well, EU, again, I mean they improved sequentially, the total industry improved in the Q2. I would say might be initially we thought the improvement is going to be more than just 8% decline and I think once you have 10% and 8% in the pocket already in actuals, well, then you have to – again, you're in same situations that you better can predict what the forecast – what the full year is going to be. There is not much improvement on the contraband. I mean we don’t have the full reading for the EU where the illicit trade stands, however when write-off through the market, we meet the markets, I mean many markets indicate that the contraband illicit trade continues to grow. It's not easy. So, France I think is one of the recent examples in the illicit trade (spike) continues to grow. So all-in-all, I think to be more realistic, we decided to revise the outlook for the industry. Maybe it's going to come better, I don’t know. Our biggest challenge, I’d repeat is – in our time biggest challenge we had this year is the total size of the industry. It's not our business performance, it is not our ability to deliver strong pricing, it is not our ability to manage the cost, the investment, et cetera is essentially the total industry volumes.
Vivien Azer - Citi: Fair enough. My last question has to do with e-cigarettes as well. Do you have an estimate on what impact the e-cigarettes could have had for the total EU or maybe specifically for some of the markets where it's bigger. You just called out France, where you’ve seen a sequential acceleration in the market declines on a substantially easier comp and as I understand it, that is one of the bigger e-cigarettes markets in the region.
Jacek Olczak - CFO: I wouldn't give a number. I mean we're looking at this carefully because, as you know, we know one of our platforms is for e-cigarette. So it's not that we are not closely looking at this category. It is difficult to give estimate. You have this (some places) information, somebody travel to Italy, to Rome and (indiscernible) France in the e-cigarettes, you go 100 kilometers outside the (Rome) and no one heard about e-cigarette. So we have to look at this anecdotal sort of the information with a little bit of a caution. I don't think – cautiousness, I don't think today is the size of the market of e-cigarette in New York is in a range higher than a 1% and presumably that might be than on the high side. I don't have a name there. I mean it's a pure speculation. You will have to – I think we need more time to really assess the different. I don't think it's comparable to what you have, for example, in the U.S. But, yes, we have (indiscernible) that is a little bit in London, but you go in a few other (counts) outside London not necessary is the case. I mean I heard it's historically in Greece and this was just another alternative to smoking at significantly lower price and as the satisfaction came, then the market disappeared, okay, whatever was the market at the beginning. So this is fairly stages of the category in Europe. As I said, we are very closely watching the sales and looking for when is the right moment, when these markets can create opportunity for us, but I wouldn't volunteer today to any solid number with regards to the impact of the e-cigarette or size of the cigarettes in Europe.
Operator: Thilo Wrede, Jefferies.
Thilo Wrede - Jefferies: Is this the most challenging environment that you've operated in since the spin-off? Or is it too much a pessimistic interpretation of your results?
Jacek Olczak - CFO: It is solid. I think the whole year is challenging. There are different challenges in a different year. So I mean at the retrospect, we presumably – we are much more focused. We'll keep our eye on the ball, quarter threes, quarter two. We reported quarter two. I'm glad it's over. We focus on the quarter three, quarter four in 2014 and 2015. So at the retrospect, we'll just treat it as the quarter. We're not managing the business at the quarterly basis. So for us, it's much more how we are confident about the full year, what is in front of us for '14, '15, et cetera, '16, '17. I mean we have a lot of exciting things in front of us, so I wouldn't – I understand the interest around the quarter, but wouldn't be over excited about the quarter.
Thilo Wrede - Jefferies: So you wouldn't say that the overall operating environment is any worse than what you've seen in the last five or six years?
Jacek Olczak - CFO: It's a challenging environment. I mean this year the challenge is, you know, the total market sizes. I mean there are some other years you had other challenges. I mean the business was not performing well. If you go back to the spring time, I mean, are we today much more confident? Much, much more confident in our ability to grow market share, to grow Marlboro to be innovative et cetera, I mean I wouldn't think – I don't think we were that strong – had a such a strong feelings about the best part of our business and that's related to (indiscernible), okay, so business is business, I mean we always kept some challenges' and no point…
Thilo Wrede - Jefferies: We don't want you to get bored. Other question I had for you is, can you give us an update on the impact of plain packaging in Australia?
Jacek Olczak - CFO: Well, if you look from the total market perspective and the market share that the market was slightly down by the mature market. So I don't think there is – we can really give you a more of the insights what's the impact of the plain package. There is some acceleration of the down-trading, is it attributable to plain impact we'll have to see, but there is some down-trading, but also market is pretty expensive market in terms of the level of the prices, prices went up we've seen the down-trading before the plain pack. Can plain pack in the mid to long-term accelerating down-trading? Yes, there is a risk we always pretty open about it and I don't – wouldn't conclude that sort of a statement just based on a one quarter. In Australia is developing nicely strong.
Thilo Wrede - Jefferies: Right and any changes to the illicit trade in Australia that you can see?
Jacek Olczak - CFO: No.
Operator: Erik Bloomquist, Berenberg Bank.
Erik Bloomquist - Berenberg Bank: I would like to circle back to Russia and just firstly the reason for the decrease in the outlook for Russian volume. It sounded like from your previous comments that's really due to a change in the macro environment and the effect that's having on consumer disposable income. I was hoping you could help clarify that. Then, secondly, I was wondering if there is a sense that the Russian government with this greater decline in volumes now will be taking that into account as they look at tax rates going forward at the end of the year.
Jacek Olczak - CFO: Well, I think when it comes to the (macros) is what we see as we have a slowdown in the economy. So Russia has still the quarters – reporting the quarters of GDP growth, but the growth dynamic is different than it used to be in part. So there is a slowdown in the economy. There was clearly less governmental spending, which presumably also goes back into that overall stage of (type) of the economy. There was clearly a (normal) range dynamic. I mean that the ranges are going up in Russia, but not at the rates last year or year before. For the first half of the year, I think the utilities prices – prices for utilities, local gas, fuel, et cetera, went up I think in the range of about 10%. I think Russia is an inflation of about 7% – 7% to 8%. So clearly above inflation, and above the range of the growth which we observed last year, because first couple of years utilities were up by about 5%. So there is something around the consumer purchasing power of disposable income, which we are confronted with. Now, Russia is – good think about Russia is we have a good tax structure, we have a visibility of a taxation for the next three years. Next year there is still in front of us quite a sizeable tax increase, which we would like to pass – to pass on to consumers. I mean it's likely above this year, because the impact of this year of the pure tax was about 5 rubles, if I'm not mistaken and we have in front of us about 8 rubles of the tax increase – just tax increase for the market. So, I don't think the government will change this one. In the outer years of the long-term tax plans, the government might take a different view on the indexation, but anyway in the plan there was moderation because the 2015, '16, at least what we understand, the taxes should go by the lower rate in this year and the next year. One thing which we have to watch for Russia, because this our experiences from our places and I hope the government also will carefully look at that is the illicit trade because usually such a situation may open the door to illicit trade, but I hope the Russian government and the Russian administration will define strongly the (leader of) market in Russia.
Erik Bloomquist - Berenberg Bank: My last question was with respect to the evolution of the TPD as you see it at this stage, given the various entities who've kind of had a first go at it and then related to that is, what looks to be the risk of plain packaging in Ireland given the U.K.'s decision to abandon that policy?
Jacek Olczak - CFO: Ireland should follow the same thinking as the U.K., let's wait for the evidence and (indiscernible) make sure that the legislations we propose is a – sound from the evidence science perspective by accounting our – the process in Ireland has not started which I've heard that they have an intention to look into plain packaging how this is going to materialize I can't say. On our TPD I spent a whole of debate about the Tobacco Products Directive will have at the plenary sessions of the Parliament around mid of September. Now, it depends how the outcome of or how the directive is going to be for at the end of the Parliament versus what the Council has decided and then they will go to the reconciliation process. So I think we will know the final shape of the directive, say, before year end, maybe early next year, around the year end. Then you'll have about the two years for the transposition into Member State law; we'll have to see what transition period the Member States will give in the domestic market and the domestic jurisdiction. So it's difficult to say, (now, that you've seen,) you have the number of committees in the Parliament, the opinions are highly divided. It's not that there is a unanimous support for the ban of slims or menthol et cetera, but I don’t know. It's difficult to speculate at which shape the directives is going to be finished.
Operator: Rogerio Fujimori, Credit Suisse.
Rogerio Fujimori - Credit Suisse: I just have one quick question in the context of the proposed EU TPD changes. Also, wondering if you could talk a little bit about Poland, the 20% is menthol and nearly 30% is slims. Would you expect some smokers to switch to other cigarettes if and when the ban is in place? Or it's more likely that we will see a surge in illicit volumes from Eastern Europe.
Jacek Olczak - CFO: I think (it puts) at risk the illicit trade. I mean I think some consumers can go and find a similar product in the illicit market already today and this was one of the arguments which we're bringing through to the EU officials at the Member State that, first of all, there is no signs if you could (place the ban) on any of this product. It's a pure discrimination in the market without any scientific base. It is difficult to argue that the superslims are more harmful than – or less harmful than the regular cigarettes. Yes, there is risk of illicit trade. Some consumers – it's the speculation, but some consumers will go back to regular cigarettes and in some countries in Europe, consumers also know how to menthol e-cigarettes themselves. So I don't know in which direction it is going to go. (Indiscernible) design the policy at this pace like it is, it will not improve – it will not deliver on the stated objective, but yes, it will create a distortion in the marketplace. So let’s see how that will unfold.
Operator: Ann Gurkin, Davenport & Company.
Ann Gurkin - Davenport & Company L.L.C.: Now, that we are two quarters into the year, is there any change in the contribution from pricing variance for the full year versus expectations when we started the year?
Jacek Olczak - CFO: The pricing variance, the 1 billion which we had just indicated, we’re looking for the very strong pricing variance for the full year.
Ann Gurkin - Davenport & Company L.L.C.: In the release, you commented on lower industry volume and I understand that's reflecting excise tax increase as trade inventory movements, illicit trade, et cetera, but is there any fundamental change and consumption patterns in any markets that is contributing to that lower volume for total industry?
Jacek Olczak - CFO: No, it's presumably that – I said that the biggest challenge this year we’ll have on the total industry volume. I think the price increase which is taking place there is not something significantly higher than in the previous years (indiscernible), et cetera. I think what we confronted is that in some geographies we confronted with this slowdowns of economy, the difficult macros, et cetera. So whatever you have an erosion in the disposable income, that has an impact. Illicit trade, obviously, started playing more important role. This is a challenge which we have in illicit trade in the form of a typical contraband crossing the borders, but also in some places like Philippines are the very low law enforcement, which results that some people don't pay the taxes, which they should pay, and that's another phenomena which we are confronted with. But in terms of the consumption pattern, smoking incidence, if you look at the mature market, yeah, there is a natural rate of a decline but nothing which you were today attributed. This is a year when the people – that the incidence goes down faster, the daily consumption rates decline faster. Actually in many countries, data sales in Europe et cetera, the smoking incidence in many countries stays flat and the daily consumption stays flat of the total tobacco product.
Operator: David Hayes, Nomura.
David Hayes - Nomura: Just in terms of picking up on the comment you made earlier about the price lags by some competitors. You mentioned Russia and then some other markets, you had seen that. I guess two questions on that. One is, is that something you feel in terms of that price lagging is a bit of a growing trend? Then secondly, is there any markets apart from the Philippines which you called out, where you've actually reversed pricing, having taken pricing during the year?
Jacek Olczak - CFO: The price lagging here, it happens every year in different places. I think it's sometimes is a months, sometimes is a couple of months. I mean Russia was a little bit on a longer side, so that's clearly is something, which put the pressure. Finally prices were implemented. I mean is more of the tactics rather than I think the sort of a strategy and second question, no it's just Philippines when we had this very the specific situations when we had to react with the pricing.
David Hayes - Nomura: So just on e-cigarettes and perhaps some of those comments earlier I mean now I'm understanding, my understanding at least is that your plan is to come into e-cigarette/next generation products commercially 2016/2017 is that still the right understanding, or are you saying that if the market develops further you're positioning yourselves to come in with other products ahead of that chronological process that you talked about in the past?
Jacek Olczak - CFO: To be precise, we have said in 2016, 2017 as well stock growth on that two platforms, the first two platforms and this is where we (indiscernible) this year et cetera, but we are working essentially at the same time on the three platforms in a different stages of development, but even the platform third platform, which is very say close to us, can be treated as e-cigarette is also on our agenda.
David Hayes - Nomura: I guess you could come to market with something commercially in that area earlier than 2016 potentially?
Jacek Olczak - CFO: When we will go to the market, we will announce when we'll go to market.
David Hayes - Nomura: Then my final question is to clarify I guess just in terms of the guidance and some of the trends that people highlighted, I guess you talked about the fact that these markets Indonesia, Russia, EU, Turkey obviously, the volumes have lowered since the beginning of the year in terms of outlook, but then you just made the point, the pricing wise, you not changed your outlook since the beginning of the year in terms of the pricing you expected to take through the year. So I'm just (indiscernible) why the guidance is so is unchanged, what the moving part is that offsets that volume declines that you've seen in the number of key markets that you've mentioned today.
Jacek Olczak - CFO: Well, listen, I mean as the guidance has – we're taking into consideration all elements which we knew at that time. I mean there were the pricing at the beginning of the year. If I'm not mistaken, we had about 7% to 5% of the pricing realized. So we knew what we're going to have in pricing. There were some prices also changed more recently, some are little bit earlier for different reasons and the timing of the target increases has changed, et cetera. So the whole guidance is a blended all number of the factors.
David Hayes - Nomura: But is it fair to say, I guess, that is also maybe a little bit less expenditure plans, just at the beginning of the year or more cost savings potentially? Is that an area where the $300 million can actually be higher to help delivery?
Jacek Olczak - CFO: The cost savings in terms of productivity to plans of the $300 million, I mean we deliver income on schedule, so we had it already in our guidance and no, the comp – we knew that we'll have the comp in the second half of the year much better than the first half of the year. So those factors were in the guidance.
Operator: Thomas Russo, Gardner Russo & Gardner.
Tom Russo - Gardner Russo & Gardner: Two quick questions. One involves the pension liabilities in light of the rise of the long-term interest rates. You're fully – your funded status might lead some restatement upwards or downwards in liability. I'm curious about that. Second, in Spain, what steps can you take? It sounded like the cigarette volumes are down 12% and the (indiscernible) were up 26% I think you said, that's why the staggering directions, any subset underway to reverse those trends?
Jacek Olczak - CFO: Well, starting with the first one, it's very (indiscernible). I mean all our pension funds are well funded, I mean well above the statutory limit. So I mean we – if I read your questions properly, we don't expect any prices on that front. When it comes to Spain, yes, I mean it clearly is the government going into finally recognize that there was too much of the gap between the taxation overall (year one and as) manufacture cigarettes is very helpful. So it's (moving) a few quarters. We should see very hopefully some improvement. I think we've seen it in Italy when the government taxed at all your one fine cut product a little bit more, you could see (over and out) that you have some results of the trend, which is obviously helpful for our cigarette, manufacturing cigarette category.
Tom Russo - Gardner Russo & Gardner: In Italy your numbers seem to indicate that there was that – what is the level of market share for roll your own in Spain at this time?
Jacek Olczak - CFO: I think it's in the range of 12%, if I'm not mistaken.
Operator: Chris Bird, Bloomberg News.
Christopher Bird - Bloomberg News: I wanted to ask, are you surprised by the volatility in the movement in currencies and are there new steps or additional steps that you were taking because of this?
Jacek Olczak - CFO: Well, I think, I'm surprised as everyone else is surprised because the whole market these days are pretty volatile and people are reading every announcement from every central bank and they are reacting to this thing. I mean you see in our announcement, I mean our outlook for the currency is revised by mainly for the – because of the Russian ruble, Mexican peso trillion dollar etcetera and actually on the Japanese yen and on the euro, where it worked, pretty well hedged at the beginning of the year with over – there were some opportunities during the year because the currency was very volatile and we use this opportunity, so we feel much more confident about the yen now and the euro impact on us, but the rest of the currency is, yes, there is a volatility in the marketplace.
Christopher Bird - Bloomberg News: May I ask you one last question on electronic cigarettes? Can you give a little color on I guess how they fall short to the taste and the feel of the consumer and would you go as far as saying that the popularity that the demand for e-cigarettes may actually falter over time? They may not become as big as some project?
Jacek Olczak - CFO: Well, here and also (indiscernible) or testing the products, looking the product. It's not a product which is very close to the conventional cigarette and I think the consumers are looking for something which is at least the similar. So the product has its own taste deficiencies, but it's a new category, so that everyone is working on how to improve it, I mean a year from now the situation might be different, but today I don't think that the product is performing well on the taste side, okay, it's pretty tasteless in other occasions. It's also the question of good manufacturing practices. You know the product is not regulated, so I don't think the consumer have a confidence that what they're buying is really something which they would like to use and as I said earlier I think today there is marginal difference phenomenon of the price than anything else and when the price comes to play, you know, consumers are willing sometimes to comprise it off. Will it last long? I don't know. It remains to be seen.
Operator: Thank you. I’d now like to turn the floor back over to management for any closing remarks.
Nicholas Rolli - VP, IR and Financial Communications: Thank you very much. That concludes our call, I apologize for going over a little bit, but we did want to make sure that we took all the calls that were in the queue. If you do have any follow-up question, you can contact the Investor Relations team. We're here in Switzerland; the numbers are posted on our materials. Again, thank you all for joining us. Have a great day.
Operator: Thank you. This concludes today's conference call. You may now disconnect.