Philip Morris International Inc. (PM) Q4 2013 Earnings Report, Transcript and Summary

Good day and welcome to the Philip Morris International Fourth Quarter 2013 Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and a question-and-answer session. (Operator Instructions) 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.

Thank you. Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2013 fourth quarter and full year results and you may access the release on our web site at www.pmi.com. During our call today, we will be talking about results for the fourth quarter and full year 2013, and comparing them to the same periods in 2012, unless otherwise stated. Our references to PMI volumes are to PMI shipments, industry volume and market shares are the latest data available from a number of internal and external sources. Net revenues exclude excise taxes, operating companies' income, or OCI, is defined as operating income excluding general corporate expenses and the amortization of intangibles, plus equity income or loss in unconsolidated subsidiaries net. Our OCI growth rates are on an adjusted basis, which excludes asset impairment, exit and other costs. Data tables showing adjustments to net revenues and OCI, for currency, 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 are at the end of today's webcast slides, which are posted on our web site. 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 André Calantzopoulos, our Chief Executive Officer. Jacek Olczak, our Chief Financial Officer, will join André for the question-and-answer period. André? André Calantzopoulos: Thank you, Nick, and welcome ladies and gentlemen. As expected, we finished 2013 with a strong fourth quarter. While our cigarette volume declined by 1.9%, excluding the…

Thank you. We will now conduct the question and answer session of the conference. (Operator Instructions) Our first question is coming from the line of David Adelman with Morgan Stanley.

Hi, André. A couple of quick things, André. First, on the dividend. It's obviously a Board decision, but do you think there is a willingness this year to further take the payout ratio above the 65% target, so that there could be dividend growth? André Calantzopoulos: David, you said it yourself. It's the Board decision. However, the Board takes into consideration a number of factors, 65% target being one. Clearly, if you look at our history, we have a history of rewarding generously our shareholders even in turbulent times. That's what I can tell you.

Okay. Then, Andre, in the Philippines, you gave a lot of statistics and data, but could you explain? If you don't look necessarily at declared tax volume by your competitor, what really ultimately matters to you right is what's being reflected in the marketplace in terms of competitive pricing, and if you were to benchmark Mighty's price point versus Marlboro or Mighty's price point versus Fortune's, how much progress has there been made? How much more evident does it appear if there is competitively reflecting reality? André Calantzopoulos: David, clearly there is an improvement as I also said in my remarks. Clearly, we are seeing [the price] [ph] of the Mighty brand greater than 70% of the portfolio of Mighty Corporation going up to PHP1.50, although the price per carton does not yet reflect the second excise tax increase if we speak about reasonable economic returns. What has also happened is they left behind one of their brands called Marvel that represents 30% of the portfolio and roughly 6% to 7% of the market. Until this brand also goes to the right price point and price gap, clearly we are also obliged to maintain some presence in the segment. In summary, this is all about achieving the right price gaps as I have previously explained, but in general to fix the price gaps either you do it from the top or from the bottom, it appears that some progress is made to achieve this from the bottom. We need to wait until the new tax is reflected across the Mighty Corporation portfolio. Then as I said, there may be some upside in there. Now, they are still under declaring from what we understand based on mix and tax stamp [inaudible] a very large part, roughly half of their volume which helps them subsidize the lower price, but there is progress. There is increasing pressure on them. There are hearings in the Congress and also the fact that they lost their bonded warehouse, which we understand they were used to kind of declare that the products or the raw materials are for exports but essentially been used locally so that the pressure is mounted. We are kind of optimistic, but we'll know better as the year unfolds. Also to say, if we look at the outlook for next year, clearly, I think in terms of Philippines, probably we'll reach the bottom of the negative impact and we can only go better next year both in comparative and even in absolute terms.

Great. Thank you.

Our next question comes from the line of Chris Growe with Stifel.

Okay. Thank you. I wanted to ask you first, André, in relation to the Philippines and having the government pressure in the company. Obviously, the price point still being too low, but can you give some information about the warehouse being shut down and taken the license away. Is that not forcing like in a more immediate movement by the company to raise prices at retail. That's not happening as quickly as you maybe thought it would? André Calantzopoulos: Difficult question to answer. Yes. The pressure should be there, because it's becoming extremely visible to the general public and the media, so we should expect some move but we need to see this move. That's all. Okay? Now, the other limitation on the Philippines that I explained in previous times is that over the long-term the tax system clearly is locked in our favor, because it closes the gaps top to bottom in a normal operating market and also allows us as the two tax tiers equalize to unleash a bit more pricing power of the mid-price brand because today the mid-price brands are down. By the way, the excise tax or the price of the different excise tax tiers is calculated which as you take the retail price you remove VAT and the excise tax and government ignores completely the retail margin which as we know is pretty hefty up to 20% and that's the price and that ex-factory price that determines the price tier which are classified and we have to be very careful on how much pricing we can take for Fortune for example not to jump in the upper tier. As the two tiers close over time, one or two years then you have much more pricing power from that perspective. Other development also that is positive in the Philippines, good at least, is that there will be pack stickers implemented towards the end of the first half of the year and we have to see how this impacts Mighty but definitely is another positive to us, so that's why longer term we are very optimistic about the Philippines, but still this year it has the impact I described on our profitability, it was about [inaudible].

Okay. That's good color. Thank you. I just had a quick follow-up question for you on Japan. Understand that you are calling it still a significantly challenged market I think it was the term you used. It seems like they are going to get some pricing through that. I just want to be clear, is that going to be more than the tax increase? And if that is the case even if it declines a little bit more than the 2% underlying rate, wouldn’t that make for a better Japan in 2014, maybe that which you assume before? André Calantzopoulos: This is very early days in Japan. We have submitted our request to the Ministry of Finance, but it is subject to approval by the Ministry of Finance. If that holds and we hold it well, yes, it will give some positive pricing in Japan. However, we need to put this in the context of and that depends also what other competitors are doing of some additional potential impact on our share and also the fact that we may need to put some promotional, additional money to support that price level. Again, it's early days. It's subject to approval by the Ministry of Finance, but there is some small upside over there.

Okay. Thank you very much for the answers.

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

Thanks. Hi, everyone. André, we can appreciate the fact that you are willing to invest more into the business in 2014 to compete more effectively in some of your challenged markets. If I take a step back though, one of the drivers that's causing you to perhaps spend a little bit more is maybe the emergence of some of the newer competition, whether it's the local discount player like Mighty or JTI getting more aggressive in Japan or you've got the illicit trade that's picked up? I just want to get your perspective on why you think you are confident that the spending you are making in 2014 is really enough to put you in a position to compete more effectively to drive the company to grow in line with your long-term target in 2015 and beyond. André Calantzopoulos: Okay. First of all, the investment as we described is, one part is going behind our reduced risk product, okay? Clearly this is longer term as we were starting some volume in this product [in 2013] [ph], okay. Now, regarding the existing business, of course, there is need for investment in Japan and that is also to support our product introductions at the Marlboro campaign and other initiatives that I described. Some other markets where business needs are, we are ramping the investment. For example, Indonesia, okay? That's part of that normal business spending. Clearly, the investment in the Philippines is another type of investment. It's not a promotion or a marketing investment. It's more investing in our margins by holding the right price gaps and that's where the big investment is. As I explained this one, I believe this year clearly we see the bottom of the problem, and we can grow significantly out of this, just remaining flat year-to-year in the Philippines in terms of profitability it will increase by 1% of growth, [it just swings] [ph] 2 growth points, okay. I think also that for 2016 one element is our cost base in terms of manufacturing cost, will gradually improve. Already, if we see the growth of our manufacturing cost, it was 3.8% in 2013. It's going down to 3.2% this year and will further decrease next year and that's a positive addition. The conditions in Europe, I think, will slightly improve. We still have strong price base and we have a number of portfolio initiatives, including new initiatives on Marlboro I will describe in more detail in CAGNY. All that makes me fairly confident that after 2015, we can reach our revenue and operating companies' income target. And I don't even take into consideration Japan, which can certainly improve compared to the impact we have this year as we are lapping the year, where the actual product introductions happened in Japan and where Japan Tobacco got their fair share of excitement, which I remind everybody that were not existing before. Thank you.

Okay. Then just on the share buyback outlook for 2014, I can appreciate you're sort of looking at the rating agencies and the metrics that they looked at. We also looked at your stock price and valuation and it seems like really an opportune time if – certainly if the fundamentals are improving as we expect them to that it might be more of an opportune time to get more aggressive on the buyback. So, I just want to understand kind of your thinking process on the moderation in terms of the buyback. Is it really the currency issue? Are you willing to take on more U.S. dollar-denominated debt to kind of fund the buyback? What's sort of the thinking process there? André Calantzopoulos: Okay. I mean, currency clearly plays an important role here. Different agencies look at ratings in different ways as I said, ranging from total debt to EBITDA to net debt or adjusted net debt and one element in the adjusted net debt is that rating agencies start taking cash abroad at a discount, because, I mean, applying a theoretical, say corporate income tax rate, if that cost were to be repatriated in the U.S., so that reduces the capacity and you can do the math very easily yourself. The currency impact we just announced at prevailing rates, that is to stick for the year. It's at the cash flow levels, it's roughly $1.1 billion and at your EBITDA level is $1.3 billion, $1.4 billion, so that takes a lot of share repurchase capacity out and as the year unfolds, we need to reevaluate the situation, so the other thing we need to note is we had $2 billion of business development projects that we just accomplished and frankly speaking, they're much more accretive to the shareholders than the share buybacks.

The 2 billion, I'd say that's the $0.10 accretion that you called out in the…? André Calantzopoulos: It is net.

It is the net? Okay. André Calantzopoulos: It is net of the impact it has on the lesser share repurchase.

Understood. Okay. Got it. Thank you.

Our next question comes from the line of Jon Leinster with UBS.

Good afternoon, Gentlemen. Just sort of a bit of a follow on. Just to clarify again. Apologies for this one on the share repurchase. When you say getting towards the high end of your ratios for the credit rating agencies, do you mean that that by the end of 2014, you'll be towards planned and/or currently believe and therefore, in essence, you're flagging that perhaps in 2015 they'll have the cash returns or – will have to be more in line with cash flow and leverage held sort of more flat in 2015? Is that a reasonable assumption? André Calantzopoulos: Well, first of all, our current ratios are already at close to the upper end and had we continued with the $6 billion share buyback, we will have exceeded the ratios during the year if the currencies remain where they are today. Okay? This is one of the reasons, because what I would reiterate is that we want to absolutely maintain our rating. We had to moderate our share repurchase product. Now, looking at 2015 is a bit early days to say exactly what the target share buyback is going to be. I mean, I would like to see how the situation in the currencies unfolds during the year and then we'll take a decision later on. It's a bit very early to call it. I mean, clearly, we are [Inaudible] share buybacks, and the corridor in which we operate is, on one side, a credit rating upper limit and on the other side 100% cash outflow to the shareholders through dividends and share buybacks and we will always operate within that corridor in the future. That depends on currencies, interest rates, and longer term tax reforms in the U.S., I'm stating the obvious. Okay?

But you are going to maintain that credit rating? André Calantzopoulos: Yes.

Okay. Secondly, the Latin America or/and Canada region in the fourth quarter looks very strong profit performance in the fourth quarter. Is there anything, can you detail anything in particular that's behind that? Particular market or. André Calantzopoulos: It's a bit across the market, okay? It's also depending on the timing of price increases in Argentina as we know Argentina is an inflationary environment and we need approval from the Ministry of Finance all the time, the Minister of Economy. So, sometimes we have a delayed approval and that's partially what happened also in last quarter. We got the approval later, so we had to time differently the price increases.

Got it. Lastly, just on the EU, if you see EU volumes are down sort of 5.5 or thereabouts in the second half of 2013. Why do you expect to get somewhat worse in 2014 sort of six to seven? André Calantzopoulos: This is the best we can see to-date, okay. There is still some pricing that has to take place. The situation clearly looks slightly better last two quarters and I hope it's going to be confirmed in the first quarter 2014, okay? So, that's the forecast to the best of my knowledge to-date.

There's no change in terms of, there's no obvious signs that the governments particularly in Southern Europe are cracking down on illicit or something's changing in the market? André Calantzopoulos: We don't have the latest, latest figure of the global survey in the European Union. What I hear from the different markets, it seems to have stabilized. Clearly, it has improved in Italy. It's slightly up in France, but we see stability although the base remains high, so I think that if it doesn't get lost during the year and frankly, we don't have disruptive taxes in the European Union. Maybe we'll be slightly better, but today I cannot confirm that. I want a quarter more to be in a position to confirm.

Okay. Thank you very much.

Our next question comes from the line of Erik Bloomquist with Berenberg.

Hi. Good afternoon. Firstly, with respect to the foreign exchange headwind, could you break apart in that 13% or $0.71, how much is transactional and within that, how much is related directly to Japan. Then with respect to the transactional component at prevailing rates is it fair to think that that would disappear in 2015? André Calantzopoulos: Okay. Look, I can't give you the absolute precise number for the breakdown between translational and transactional. I think [Inaudible] 20%, but Jacek is here. He can give you a breakdown.

No. You are right. André is right about last year. It's about 80% of our import was coming from translations and the remaining 20% was the transactional. With regards to the impact our $0.71 per share currency impact about 30% of the $0.71 versus the last year is coming from yen and 70% is essentially across all currencies and then there is a strong impact coming from Indonesian rupiah, ruble, Turkish lira and a number of other currencies.

Okay. Thank you. Then with respect to the plain packaging, I was just wondering if you could comment on an article that appeared in The Scotsman suggesting that, PMI was suggesting if plain packaging was passed in Scotland, that country could be liable for GBP 500 million in compensation for the intellectual property. I was wondering what does that imply. Then if plain packaging goes forward in markets like Ireland and the U.K., can we gross up the amounts that might be expected based on the volumes there. Then just wondering what the status was of the WTO challenge and the BIT arbitration? Thank you. André Calantzopoulos: Okay. The article you are referring to, Erik, I have no idea. Frankly speaking, it is pure speculation, because I haven't seen or articulated any related number. Okay, first of all, we are far away from being in this situation, as you know, both into the U.K. and Ireland. It's just political talk for the time being and I don't see any new evidence has appeared in the horizon to justify even the U.K. reopening the issue. Now coming to the real concrete case, we have in front of us, which is Australia. Okay? If you look at the facts in Australia, is that plain packaging has no impact on prevalence or incidence after a year it is in the market, okay? I don't know where you can find stronger evidence about the impact, and, yes, we see a little bit of down trading, but we had foreseen this and that's part of what we explained in the BIT case. Regarding the cases, WTO is proceeding and the BIT case, if I'm not mistaking, a fresh hearing after submissions of written arguments from both parties is towards the end of February, actually this month, so we will see how this unfolds. As we always said, this is not a process that is going to take months. It's going to take still a year-and-a-half two years, okay?

Okay. Thank you. My last question then was with respect to illicit, and I was just wondering I appreciated the comments on illicit in Europe, but how would you characterize it globally for PMI's markets? Related to that, what are the prospects of recapturing illicit volume and what are the factors necessary for that? Thanks. André Calantzopoulos: Look, the only outburst of illicit is clearly the Philippines, okay? I think I have explained lengthily the situation. We are all aware of the problem, but that's illicit trend in a different form. That's a form we see increasingly in some places and that's probably the form that is the easiest finally to address, because it takes action from the government. A painful process in the Philippines, but that can be addressed. For the rest of the illicit trade, which is essentially illicit wide, we always said that the best way to address this is through the supply chain and especially asset in total and I think we are making very good progress in that area. Not yet done, but the progress, the awareness amongst the companies that produced in their efforts fairly confident and hopeful that by the end of the year we'll see tangible results. That’s one of the best ways to tackle illicit trade. I think that our prospects to reduce the illicit trade our objective is over the next one to two years to stabilize it and we are working with many governments as you know around the planet to achieve this and then gradually reduce it, but even stabilizing it is a great thing to achieve.

Thank you.

Our next question comes from the line of Thilo Wrede with Jefferies.

Andre, I think this time last year you had already 75% of the pricing that you needed for your guidance. I think you just said that you are now at 60%. Can you give us the details why it's so much lower? André Calantzopoulos: Nothing particular that I can point to, okay? As we said last year, we had a bit more of inventory movement in the Philippines that was lower this year, because the tax increase was lesser. That’s one thing and the rest is pure timing. Indonesia is every year is the same. We start with the tax at the beginning of the year and gradually increase, so nothing particular to worry about.

We shouldn’t read into that you are may be taking a more cautious approach to your pace of price increases. André Calantzopoulos: I think our pricing policy is very simple. We take a lot of factors into consideration, affordability price gaps, excise tax and our pricing is every year very strong. I think, I explained in my remarks there's slight differences compared to this year.

Okay, and then the other question I had in your conclusion of your prepared remarks. You pointed out that you expect to get back to your normal growth rate for revenue and operating income in 2015. You didn't mention EPS. Is there a reason for that? André Calantzopoulos: EPS depends on our share repurchases, okay? That's the bridge, and I explained what are the driving factors behind our decisions in share repurchases, so, in any given time we may be slightly above or slightly below that bridge. As I said, it is too early to call next year, okay?

Understood. Okay. That's all I had. Thank you.

Our next question comes from the line of Michael Lavery with CLSA.

We've covered Philippines fairly well, but I just wanted to get one more question on that about the Marlboro flavor code launch in Mindanao. Have you seen that have a big impact there? Is it helping drive share? What's your thinking about how that's positioned and how it's working so far? André Calantzopoulos: Early days. The launch is both, tactical and strategic, so it's not meant yet to be expanded, so we will see how it reacts there, but that's kind of hedging also the price gaps in the Philippines.

Thank you. That's helpful. In terms of margins or the cost structure, how different is it and what kind of impact does it add to the mix of your business? André Calantzopoulos: I can't answer by heart these margins. The margins are not very different, but this is a very small volume, okay? So, I don’t think that impacts our margins. Cut to skin in the Philippines, as I said by maintaining artificially low price for a period of time brands like Jackpot for example, where we have to subsidize to a large degree the excise tax and that’s much more impactful and it would correct this that will swing the profitability much more than Marlboro flavor code.

Okay. Great. Thank you. Then just looking at Indonesia in its 3Q, when the inflation pressure on the consumer was the strongest and the category growth was the weakest, you gained share sequentially and year-over-year even despite having such a premium skew to your portfolio. Can you describe what changed in 4Q that would have gone down and what does it look like going forward? Is there some new competitive launches that are driving it or what are the big factors there? André Calantzopoulos: Well, I think the important thing is the performance as I said in my remarks of Dji Sam Soe and Sampoerna A, the two hand rolled kretek brands, but cost during the middle of the year, the price points and competitive brands in the same category, have not yet crossed that point. I don’t know exactly their pricing, but logic says that during the second half of this year, they should cross that point and should help our share. Okay? For the other brands in the portfolio are doing very well. And as I also said, we are increasing the marketing support of the brands, so I'm fairly optimistic about the share situation in Indonesia.

But isn't likely to have pressure in 1H '14 driven from those two brands until the price points on competitors cross some of the same thresholds? André Calantzopoulos: I didn't hear the question?

You said that the competitors price points are likely to catch up crossing some of the same thresholds in the second half of this year, so is there likely still a lot of pressure in the first half? How do you see that playing out? André Calantzopoulos: I don't know how competitors are pricing. I cannot predict this obviously, but Indonesia in general, the tradition is, as I explained previously that, at the beginning of the year, your price is covering the excise tax increases and then you get net pricing during the year. You always have gradual pricing in Indonesia during the year, okay? As the year unfolds, we have our plan for pricing. I would expect, also given the excise tax and continued pressure from the clubs, other manufacturers are going to have a similar approach. So, yes, we will be probably under some pressure for the next few months, but overall we can see moderate share gains during the full year.

Okay. That's helpful. Clove prices I know were in issue last year. There is not a whole lot of visibility on those, but it does look like they are down from the peak levels pretty nicely. How are you positioned there? Is that a tailwind in 2014? André Calantzopoulos: I wouldn’t say they lower in rupee terms. Clearly, the evaluation in dollar terms they have come a little bit down. Now, the purchase has happened in the market. We are quite I would say lucky this year that we had second year of a very decent cold, but if you look at the impact on us, we had a very big impact on our costs in 2012, '13 is going down and as we annualized the inventory replenishment the impact is going to be even lower in comparative terms next year, so we our other price stability and our price is going down.

Okay. That's great. Thanks. Then just back to Japan pricing. Could you give a sense? I know you talked about how it looks like, the applications you've put in should give some net pricing. What's the split in the portfolio? Is my math about right that that would be around the 4-ish percent increase? If so, how much of that do you see maybe being at risk of trading down? If your applications are approved, what kind of net pricing do you think you might be realize? André Calantzopoulos: Yes. Day one, if you do the math, it's 4%. You are right, but then way also there Ministry of Finance is looking at areas, what the end result is going to be, including share, some down trading from that portfolio. As I said previously, there will be some share movement. As I also said, we will put some additional promotional money for a period of time. Overall if these prices are accepted, we will have some net positive.

Okay. Great. Thank you very much.

Our next question comes from the line of Vivien Azer with Citi.

My first question has to do with Indonesia. I mean, I think it seems reasonable enough to expect that, that market will decelerate a little bit further into 2014, but can you offer a little bit more detail about kind of how you are thinking about the macro landscape in that market, just to give us comfort on that plus one, given kind of the challenges you had with guidance in that market last year. Specifically, are you expecting a reduction in the subsidy for fuel, because there's some chatter about that in the market. André Calantzopoulos: Okay. Look, the positives about Indonesia is it has positive demographics. Also, I think long-term account, it has a lot of potential and we have seen that there is up trading this year, last year and I expect up-trading to continue this year. We had some particular issues. The first one is, the disappearance of the low tax tier, but in a shortcut we call the sister companies. That has a 3 billion cigarette impact on us and we have discontinued these brands actually, but other competitors are much more affected. Clearly, it's either discontinue these brands or you take very substantial price increases, which I think is reasonable to assume it will have some impact on total market this year. Okay? This is one of the key factors why we have predicted its prediction 1% total market growth. The other one is the devaluation of currency is bringing inflation, and many of the goods in Indonesia including fuel are important, so we are seeing some inflation happening. That’s, again, unfortunately hit the low end consumers. If we see some deceleration is at the low price segment, and bigger the factor that I can describe today, but long-term as I explained, I think the country has tremendous potential.

Understood, so just to clarify, the embedded in your guidance is there no expectation for a change to fuel subsidies. It's just the inflation? André Calantzopoulos: To be honest with you, Vivien I don’t take the fuel subsidies actions, because I don’t know how to factor the mean, but try to bake in all this factors I described and that’s the best guest we have.

Okay. That's reasonable. Yes, complicated math to be sure. Turning to Russia really quickly, you called out price elasticity is one of the factors driving the 9% to 11%. I just wanted to clarify, is it just normal price elasticity or is it a change in price elasticity in Russia, that’s causing your outlook for downturn for industry volumes at the mid-point? André Calantzopoulos: I think, if I recall correctly, we took a slightly higher price elasticity given the magnitude of the increases. We need to look at the history of Russia, where with a tax plan which is very welcome, because it gives us predictability. We had three subsequent years of a substantial tax and price increases, so it's not only one year. Its three years. I think it's reasonable to assume some higher elasticity. Now, whether 9% to 11% is the final number we'll see as the quarters unfold, okay? I want to remind you two things. First, that this is the last year of large tax increases and we should be looking at a better tax environment, although continuously predictable as of 2015 and beyond. Secondly, despite this projected quite large volume decline, we also, as I said in my remarks, foresee a pretty substantially profitability growth in Russia due to margin improvement.

Understood. A follow-up on Russia. Embedded in that outlook are you seeing any negative impact to volumes from the implementation of wave one of the indoor smoking bans in that market? André Calantzopoulos: Marginally, it's always the case. We have put this in our guidance, obviously, okay? We also have, as I explained previously, this year the disappearance of kiosks. Although it's difficult to say that this will have an impact on total consumption, we have to see also what it really does in terms of impact on consumers, but always it's part of our estimate.

Wonderful. Thank you very much.

Our final question comes from the line of Ryan Oksenhendler with Bank of America.

Good afternoon, guys. André, question I guess going back to like the long-term targets in 2015 and I guess even beyond that. In November, you laid out the potential adult user base and margin potential for reduced risk product. When thinking about your growth targets for OCI, so I guess EPS will be impacted by FX, but is getting back to the target growth rate contingent upon the success of reduced risk product or is that incremental? André Calantzopoulos: If we look at 2015, clearly a contribution of reduced risk products is rather de minimis and we will be in investment mode, because of the expansion or introduction of reduced risk products for the next two, three years, okay? Reality is, for the time being the investment is going against our numbers, so at least once we come even and breakeven on this, the rest is incremental. For the time being, we are negative on reinvestment you appreciate that.

You feel still comfortable about your targets in '15 and '16? André Calantzopoulos: Yes.

Got it. I would leave it there, guys. Thanks.

That was our final question and I would like to turn the floor back over to management for any additional or closing remarks.

Thank you very much for joining us. That concludes our call today. If you have any follow-up questions, the Investor Relations team is currently in New York. As André reminded you, our next presentation will be at the CAGNY Conference on Tuesday, February 18th. Thank you, again, and have a great day.

Thank you. This concludes today's Philip Morris International fourth quarter 2013 full year earnings conference call. Please disconnect your lines at this time and have a wonderful day.