Philip Morris International Management Discusses Q2 2012 Results - Earnings Call Transcript

Seeking Alpha

Executives

Nicholas Rolli - Former Vice President of Investor Relations & Financial Communications

Hermann G. Waldemer - Chief Financial Officer

Analysts

David J. Adelman - Morgan Stanley, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

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

Andrew Kieley - Deutsche Bank AG, Research Division

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

Rogerio Fujimori - Crédit Suisse AG, Research Division

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

Thilo Wrede - Crédit Suisse AG, Research Division

Vivien Azer - Citigroup Inc, Research Division

Erik A. Bloomquist - Berenberg Bank, Research Division

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

Christopher Ferrara - BofA Merrill Lynch, Research Division

Michael Avery

David Hayes - Nomura Securities Co. Ltd., Research Division

Karen Lamark

Thomas Adrian Russo - Gardner Russo & Gardner

Operator

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

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

Nicholas Rolli

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

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

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

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

Hermann G. Waldemer

Thank you, Nick, and welcome, ladies and gentlemen. We again achieved strong underlying business results in the second quarter, with actual results impacted by both unfavorable currency movements and the hurdle we faced in Japan due to our extraordinarily results there during the second quarter last year.

Our organic cigarette volume in the quarter was down 1.2% to 238.3 billion units. However, excluding the Japan hurdle of 6.3 billion units, organic cigarette volume was up 1.4%. In addition, our organic volume of other tobacco products increased by 11.8% in the quarter.

Net revenues and adjusted OCI, excluding currency and acquisitions, were up by 2.9% and 3.5%, respectively. Without the Japan hurdle, our growth rates would have been in line with our annual mid- to long-term currency-neutral targets of 4% to 6% and 6% to 8%, respectively.

Adjusted diluted EPS reached $1.36 in the second quarter, slightly ahead of last year and were up by 9%, excluding the currency. If one also takes into consideration the previously disclosed Japan hurdle of $0.10 at an EPS level, then adjusted diluted EPS, excluding currency, was up by a very strong 17.7% in the second quarter.

Our results for the first half of the year were excellent. Organic cigarette volume was up 1.8%. Excluding currency and acquisitions, net revenues and adjusted OCI grew by 6.5% and 8.3%, respectively. Finally, adjusted diluted EPS increased by 13.3%, excluding currency.

These results confirm our expectation of solid organic cigarette volume growth in 2012. We have the best geographic footprint in the industry and leadership in both emerging and developed markets. Our volume is growing strongly in many markets in both the Asia and EEMA regions, offsetting weaker volume trends in the EU region due to the deterioration of the economic situation and weaker consumer confidence. Consequently, we expect to continue to grow currency-neutral profitability at a rapid pace, with sustained strong pricing and a favorable product mix only partially offset by an unfavorable geographic mix.

Exchange rates, however, continue to be volatile. At prevailing exchange rates, the forecast currency headwind this year is slightly higher than the $0.25 per share that we predicted in June. However, our underlying business is very strong, and this is expected to offset the additional unfavorable currency impact of $0.02 per share.

We are therefore today reaffirming our reported diluted 2012 EPS guidance of $5.10 to $5.20 compared to $4.85 in 2011. On a currency-neutral basis, our guidance implies a forecast growth rate of approximately 10% to 12% compared to adjusted diluted EPS of $4.88 in 2011, this despite the Japan hurdle and weak industry volume in Europe. Let me remind you that our mid- to long-term currency-neutral annual growth target for adjusted diluted EPS is also 10% to 12%.

As we indicated during our Investor Day last month, cigarette industry volumes in the EU region were unusually depressed in the second quarter. The overall decline was 9.7%, with significant reductions not only in markets such as Greece and Spain, but also in Italy and Poland, with even Germany suffering a 5.1% drop. The decline was driven by a reduction in daily consumption, while smoking incidence has remained relatively stable.

For the first half of the year, cigarette industry volume in the EU region was down 5.8%. This confirms that the second quarter decline was unusually severe as adult smokers adjusted to the renewed recessionary environment and there were some unfavorable timing issues. Our current expectation for the second half of the year is that the decline rate for cigarette industry volume in the EU region should be similar to that experienced during the first half of the year.

The average unemployment rate across the European Union increased by 0.7 points between June 2011 and May 2012, with significantly more pronounced increases in Greece, Spain and Italy. Only Germany showed a meaningful decline.

As a result of the deteriorating job markets, the average unemployment level in the EU stood at 10.3% in May, with Spain and Greece double this level. France and Italy are just below the EU average, while Germany and the Netherlands continue to have relatively low levels of unemployment.

We have always highlighted unemployment levels and trends as key indicators for industry volume. We therefore do not expect a return to the normal underlying decline rate of 2% to 3% in the EU region until the issue is addressed in a meaningful way.

We have achieved a resilient market share performance in the second quarter, with 38.5% overall in the EU region, 0.2 points below the previous year's level. On a half year basis, our share of 37.9% was down 0.4 points.

We are very encouraged by the performance of Marlboro in this difficult economic environment. In the second quarter, Marlboro's share in the region grew by 0.3 points to 18.4%, and it was up slightly on a 6-month basis. Marlboro gained share in the quarter notably in Belgium, Czech Republic, Finland, Germany, Greece, Hungary, Italy and Poland. L&M continued to grow share in such markets as Finland, Germany, Poland and Slovakia, but this was not enough to offset declines in the quarter in Greece, the Netherlands, Portugal and Spain. Chesterfield is performing very well and is being successfully established as a strong second leg for us in the low-price segment in the EU region.

We are rapidly gaining share in the growing fine cut category. Industry volumes increased by nearly 8% in both the second quarter and the first half, as adult smokers down-traded to less expensive options. Our share of the fine cut category rose by 1.4 points in the quarter and by 1.7 points in the first half to 14.1% and 14%, respectively.

The market situation in Italy deserves specific attention. Cigarette industry volume in Italy declined by 10.5% in the second quarter and by 8.5% in the first half of 2012. The most important single factor has been a reduction in consumer purchasing power, aggravated by the payment of increased property taxes in June and the increase in cigarette prices over the last 12 months. This unfavorable development in the cigarette industry is not a unique phenomenon as a wide range of consumer products have been affected by the economic slowdown.

Impacting specifically the cigarette industry, there has also been down-trading to the fine cut category and an increase in illicit trade, particularly the so-called illicit whites, with brands such as Jin Ling and Classic. Despite recent price increases, the fine cut category grew by 74.6% in the quarter, though it still represents a relatively modest 6.5% of total tobacco industry volume.

In terms of market share, Marlboro is performing strongly. It gained 0.3 points to reach a 23% share in the quarter, despite the continued pressure on the Premium segment. However, our overall cigarette market share declined in both the quarter and the first half, as the strong performance of Marlboro and the launch of Philip Morris Selection in the low-price segment were unable to offset the decline of our local heritage brand Diana. In contrast, our share in fine cut grew by 24.5 points in the quarter to a record level of 31%, firmly establishing us as the category leader in Italy.

In Germany, cigarette industry volume declined in the quarter by 5.1%. This was attributable to the impact of the recent price increases, a decline in consumer confidence in spite of low unemployment rates, a difficult comparison with the second quarter last year that was up 4.6% and some timing issues. We believe that the first half year decline of 1.3% is a better reflection of the underlying trend.

PMI continued to strong perform strongly with further share gains in the second quarter. Our share in cigarettes was up 0.3 points to 36.4%, and our share in fine cut grew by 1.2 points to 16%. We are very pleased by the improved performance of Marlboro, which gained 0.3 points in the cigarette category and 1.2 points in the fine cut category, while L&M continued to grow share in the cigarette category and Chesterfield gained in both the cigarette and the fine cut categories.

As a consequence of the industry volume declines, our second quarter results were soft in the EU region. Cigarette volume was down 9.4%, only partially offset by a strong 18.2% growth in OTP volumes. Net revenues and adjusted OCI, excluding currency and acquisitions, were down 0.7% and 2.7%, respectively. We were largely able to offset the lower volumes with higher prices. Excluding currency and acquisitions, June year-to-date net revenues increased by 2%, and adjusted OCI was just above the prior year level on the same basis.

In contrast, we had another very strong quarter in the EEMA region, and our results year-to-date June were equally excellent. In the quarter, organic volume grew by 4.9%, while net revenues and adjusted OCI, excluding currency and acquisitions, increased by 12.7% and 22.9%, respectively.

While pricing at $114 million continued to be a significant contributor to the growth in EEMA's OCI, it was almost matched in the quarter by our $104 million volume/mix variance. This is in fact the fifth consecutive quarter of positive volume/mix in the region.

This was driven by the strength of our brand portfolio, with a particularly encouraging performance of our premium brands, with volume up 7.4% in the second quarter. Overall, 9 of our top 10 brands in that EEMA region grew volume in the quarter, with just Chesterfield down. Marlboro had a strong quarter, with a volume gain of over 1 billion units or 5%, driven mainly by North Africa, Saudi Arabia and Serbia. The performance of Parliament was truly outstanding, with volume up 1.1 billion units or 16.3%, driven mainly by Eastern Europe and Turkey.

On a market basis, our strong results were led by Russia, so let me provide you with further details on this important market.

Though we do not have definitive data yet, we believe that the Russian cigarette market grew slightly during the first half of the year. We attribute this to an improvement in the economy and a return of foreign workers as the construction industry has started to pick up again. As a result of recent price increases in cigarettes, foreseen hikes in utility prices and the slightly slower expected economic growth in the second half of the year, we forecast that full year industry cigarette volume should reach a level similar to last year's.

We are outpacing industry volume. During the second quarter, our volume increased at a much faster rate of 8.7% and was 5% higher in the first half. Two very important positive aspects of the Russian market were uptrading by adult smokers in spite of significant price increases and our ability to gain market share, thanks to the strength and breadth of our brand portfolio. For the quarter through the end of May, our market share was 0.7 points higher at 26.1%, thanks to the strong performance of Parliament, L&M, Bond Street and Next.

We took a further price increase of RUB 3 per pack across our portfolio in July.

We launched Marlboro ClearTaste in Russia in June. This is a much smoother-tasting line of products, which addresses adult smoker product preference. We started the launch in key cities and have already achieved outstanding distribution at point of sale. Initial consumer feedback and trial data are positive. It will, of course, take several months before we can draw any firm conclusions.

Our performance in the Asia region was again very strong in the second quarter. This was, however, masked by the aforementioned hurdle in Japan.

Our organic cigarette volume in the quarter was up 7.4%, excluding the Japan hurdle, driven primarily by Indonesia, though down 0.7% on a reported basis. Likewise, excluding the Japan hurdle, adjusted OCI, excluding currency and acquisitions, would have shown strong increase, but it was down 2.6%, including the full comparison for Japan.

Industry volume in Japan increased by nearly 10% in the second quarter compared to the distorted period last year. For 2012, we are now forecasting a stable total market, though the underlying trend remains a moderate decline of 1% to 2% a year going forward.

During the first half of this year, Japan Tobacco accelerated its program of new launches, and this has had some impact on our market share, which reached 27.8% in the second quarter. This was 0.2 points lower than the previous quarter but still substantially above the pre-earthquake share levels.

Lark Hybrid 100s maintained an 0.4% market share, and we launched Marlboro Black Menthol Edge 8 and Marlboro Menthol Edge 1 during the second quarter. Our latest launch this month is Marlboro Ice Blast in 5-milligram and 1-milligram variants, 8-milligram variant having achieved a 1.3% market share during the second quarter. With these efforts and additional new launches in the pipeline, we are confident that we should be able to stabilize our market position going forward.

On the fiscal front, the Japanese government obtained Parliamentary approval for a two-step increase in consumption tax from 5% today to 8% in 2014 and 10% in 2015. While prices remain government-controlled, the last tax increases resulted in margin-enhancing price increases.

Volumes continued to grow in the second quarter in Indonesia, albeit as expected at a slower rate than in the first quarter. Industry volume grew by 6.9% in the second quarter, while PMI volume increased by 17.8%. Supported by a strong economy, adult smokers have been uptrading to the Premium segment, which has grown by 2 points in the first 6 months this year.

PMI has the strongest and broadest portfolio in the Indonesian market, along with an unmatched national distribution network and highly qualified and motivated employees. Our market share grew by 3.1 points in the quarter to 33.5% as Sampoerna A remained the fastest-growing brand in terms of share gains, with an increase of 1.2 points to 13.1%, and we continued to benefit from rounded price points.

Going forward, we forecast a market growth of around 8% for the full year and look for further PMI share growth, though at a slower pace than in the first half of this year.

Pricing continues to be the most important single driver of PMI's profitability. The pricing variance was $463 million in the quarter, giving a half year pricing variance of $832 million. This year, we have increased prices notably in Argentina, Australia, Brazil, Germany, Indonesia, Italy, Korea, Mexico, the Philippines, Poland, Russia, Saudi Arabia, Spain and Ukraine.

Our volume/mix variance was obviously negative in the quarter due to the Japan hurdle. However, as you can see on the chart, excluding the hurdle, 8 of our top 10 brands grew volume in the first half of the year and the other 2 were essentially stable. In volume terms, Marlboro achieved the largest growth, while in percentage terms, Fortune, Sampoerna A, Parliament and Lark all recorded double-digit growth.

We are continuing to expand our market share in our top 30 OCI markets. Our June 3-month moving average share of 36.9% is above both our 12-month moving share and the 2011 results and 1.4 share points above the 2010 share level.

Free cash flow declined in the second quarter by $703 million to $3.2 billion. Unfavorable currency movements were responsible for over half this decrease. In addition, we built up finished goods stock in Brazil and Russia, and working capital consequently increased by $388 million. This will be reversed during the third quarter when this inventory is sold.

During the second quarter, we spent a further $1.5 billion to repurchase 17.8 million shares. In June, the board approved a new 3-year $18 billion share repurchase program, which will start in August when funds from the previous program will have been fully utilized ahead of schedule. Our target remains to spend $6 billion on share repurchases this year.

Since the spin through the end of June this year, we spent $24.4 billion to repurchase 449.9 million shares, representing 21.3% of our shares outstanding at the time of the spin at an average price of $54.21.

In conclusion, the second quarter of 2012 was, as expected, a very strong one in terms of underlying business momentum, but a challenging one in terms of reported results due to the Japan hurdle and unfavorable currency movements.

As we foresaw during our June Investor Day, EEMA and Asia region results were very strong in the second quarter, enabling us to offset unusually weak cigarette industry volume in the EU region.

The breadth of our geographic footprint, the continued strong pricing environment based on our superior brand portfolio and productivity gains enabled us to grow both net revenues and adjusted OCI in the second quarter, excluding currency and acquisitions.

Adjusted diluted EPS, ex currency, increased by 9% in the second quarter. If the $0.10 hurdle related to Japan were excluded, the increase in adjusted diluted EPS, ex currency, was a very substantial 17.7%, confirming the overall strength of our business.

We have reaffirmed today our 2012 reported diluted EPS guidance of $5.10 to $5.20. Compared to adjusted diluted EPS of $4.88 in 2011, this represents a growth rate of approximately 10% to 12%, excluding currency.

Thank you. I'll be happy to answer your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Nadelmann with Morgan Stanley.

David J. Adelman - Morgan Stanley, Research Division

Two things I wanted to ask you. First, in the EU, do you think that you can maintain on a local currency basis the overall profitability of the business for the foreseeable future if volume declines persist at these above trend rates, maybe not the rate in the second quarter but higher than historical rates of decline?

Hermann G. Waldemer

Well, I'd say for this year -- I mean, for the second quarter, we expected similar decline, but at the same time, we continue to be cautiously optimistic to achieve low single-digit OCI growth, excluding currency, nevertheless. In the EU region, in years before, we had similar decline rates, we had similar results. Yes, we see continued market declines there, but there are also, talking for this year, also several positives in there. In Italy, there was still the potential VAT increase looming in September that has been called off, postponed to next year but who knows what happens until September of 2013. But it's not going to happen this year. In Spain, the VAT increase of 3% on all goods is being compensated for cigarettes by ad valorem decrease. That's good news, too, of course. And in France, some sort of price increase is going to come in the remainder of the year, and despite this economic trouble in the entire region, the Marlboro share is actually up. So overall, yes, I think we can do that, we can still achieve low single-digit OCI growth also in the EU region.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then second question, Hermann. Can you just update us all on the status of the potential excise tax increase in the Philippines and the potential for fairly substantial duty increase potentially in the GCC countries?

Hermann G. Waldemer

Okay. Philippines first. The situation there is that the House of Representatives has passed a bill with pretty substantial disruptive excise increases for 2013. Thereafter, even in that bill, the positive is that it takes a multiyear approach, but that is for now the House of Representatives. The legislative processes by far are not being closed. After the summer recess, first, the Senate is expected to weigh in on the question. Then should there be disagreement between Senate and House of Representatives, then it goes into the so-called bicameral committee. So what I'm telling you here is there is more discussions to come in the third and in the fourth quarter. Then on GCC, while there is a discussion going on, that discussion we have had many years also -- for many years also in the past, it's still an open question. I really don't have an update to that one. We'll see in the remainder of the year.

Operator

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Just a follow-up on the Philippines. [indiscernible] On the tax situation, which is helpful, but could you provide just a little more color on the current market dynamics just in terms of the market declining there, what's going on and how you expect this to evolve as the year unfolds and into next year?

Hermann G. Waldemer

Well, okay. First of all, I mean, let me start then with the economy. I see that the economic outlook in the Philippines, which is actually brilliant, I mean, the GDP, the last number I saw, I believe that was the quarter 1 number, up 6.4%, with an inflation, I think it has been May, a little less than 3%. Remittances of Filipinos working abroad, up substantially in 1 month. That's about an amount of $1.7 billion coming to the country. Therefore, I mean, in terms of consumer environment, that's actually pretty good. That translates now in the total market that for the full year, we would expect a slight growth. So I would say at the full year market, about 100 billion cigarettes. Last year was 97.5 billion roughly. So a slight increase therefore in the total market despite the price increases that was there. In terms of shares, yes, share, we lost a bit of share, and we lost that share essentially to some local company there, which, let me put it this way, sales at surprisingly low prices.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. Hermann, just a second question on your Be Marlboro campaign. Could you give us just further details on the rollout and then maybe a little more color on just some key markets where this campaign has been having a positive impact on Marlboro?

Hermann G. Waldemer

Well, first of all, it is, of course [indiscernible] started in the German market, where it has been doing tremendously well, continues to do tremendously well. I mean, it is -- as you know, it is the continuation at the end of the day and the translation into modern values of what was the Marlboro campaign, the [indiscernible] campaign stood for. So it's receiving excellent feedback, continues to receive excellent consumer feedback in the German market. In adaptations, you will find it in more and more markets around the world. It's not always going to be exactly the same what you see in Germany, but it's the same idea, the same philosophy behind. And we will roll it out from there. It just started in some Latin American markets, and it will go further. It is the new worldwide campaign.

Operator

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

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

First, in Japan, so the consumption tax proposals that you've talked about in Japan, other than the consumption tax increases, are there any discussions of national or regional tax increases that are being discussed at this point?

Hermann G. Waldemer

While not regional, what will come later in the year is, of course, a discussion on the excise tax outlook. Typically, as the budgetary year of the government goes from 1st of April to the end of March, there, as you, of course, perfectly know, these discussions will start in December, with a decision kind of by year-end. At this point in time, we couldn't predict the outcome there, but it is obvious and clear that we will be allocating for multiyear excise tax plan, which would be beneficial for both the government and their class to maximize revenues and could also be profitable for us at the same time.

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

Is there anything to glean from the fact that they did approve the other consumption tax increase?

Hermann G. Waldemer

Yes, I would say it is a positive there, it is a first step to developing an entire refinancing plan, if you like, for all the funds needed to cope with the cost of the natural disaster last year. So in that context, the discussions take place. Consumption tax was, of course, the key element in there. Excise tax, I believe, is going to be a normal discussion. It will not be dominated by that question on the consumption tax. To put that a bit into the context, that's something that is going to be manageable for us. It always, and, of course, what you assume to be the price level, and the consumption tax kicks in at that time, April 2014 and October 2015. But kind of the first increase means a rollover of about JPY 15, and the second one means a rollover of about JPY 10 per pack. That's manageable, of course.

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

Right. Okay. And you've talked about the market in Japan, the market consumption decline this year being now more stable. Can you just talk about why at least this year the market seems to be doing better than expected?

Hermann G. Waldemer

Well, at the first quarter call, I think I still expected 1% to 2% decline there. It's of course -- to be honest, it's a hard market to read with all the distortions from last year into this year. We have a prolonged period, wherein the smoking incidence have stayed stable. It has come down a little bit the last 2 months but not much. So that's why I think that the underlying, really, is probably a 1% to 2% decline going forward. Now I'm talking next years and thereafter. That's of course [indiscernible]. I'm talking about the underlying trend. But this year, when we take it all together, the obvious estimate should be about flat.

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

Okay. And then just in terms of your guidance, so if you look at first half, your adjusted earnings up 13.3%, excluding currency, even with the hurdle that you faced in the second quarter from Japan. It sounds like, just based on your guidance, maybe a little bit of a slowdown in the back half. I'm just wondering if there are any other factors that sort of makes you think that the earnings growth could slow down in the back half. Are you thinking just in terms of Europe potentially a bit more conservative stance? I'm just wondering if there's anything to think about in the back half.

Hermann G. Waldemer

No, I mean, there is nothing on the underlying business trends there. It is simply some -- often aggression of comparisons. If I take the Japan hurdle out, then organic volume in the first half has been going 3.3%. I mean, I can't expect 3.3% for the full year, I think nobody does, although we are optimistic to achieve a mid- to long-term organic volume growth target of 1% despite the hurdle in Japan. To give you one example of tough comps, if you go to the EEMA region, then the first half volume results compare to declining trends in the first half of 2011, whilst the second half of the year will compare to already an overall growth rate of 2.4% in the second half of 2011 last year in that region. So it's a bit of comps, but underlying our business is in a very good shape. And Europe has, of course, been factored in into our full year guidance.

Operator

Your next question comes from the line of Andrew Kieley with Deutsche Bank.

Andrew Kieley - Deutsche Bank AG, Research Division

Just going back to Europe and Southern Europe specifically, could you just talk about if the volume trend in those countries has changed much compared to what you indicated at the Investor Day? And what gives you confidence that the volume in Southern Europe will have been most weakest this quarter and then stabilize more in the second half?

Hermann G. Waldemer

Okay. Well, it seems they have not really changed much compared to the Investor Day projections. The quarter has come out slightly worse than what we already had highlighted there. I mean, in terms of market sizes, then the best will be to go to the biggest markets there. Germany, which has been down in the second quarter by 5.2%, is down on a year-to-date basis 1.3%. I would say in Germany, expect about 1.5% for the full year. So the 5% are not representative at all in that sense. Italy is a complicated market these days. I mean, I had it in my prepared remarks, austerity measures and consumer confidence going down, doesn't make it easier. However, I would say for the full market for Italy, I would expect something like 7.5%, maybe 8% decline. The first quarter was down 6%, the second quarter was down 10.5%. And then after, 8% could be a full year number there in Italy. Spain, I think the forecast that we had of something in the range of 10% for the full year outlook is still a reasonable assumption. It is, of course, was very important that the VAT increase has been offset by reduced ad valorem rates. Therefore, in that context, I think the minus 10% for Spain is still a realistic number. If I add in then France, then I would say take out the technical factors and stuff. Something like 3% is probably a realistic assumption for France.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. And then the other question I had is just your commentary in the guidance, the language about the anticipated business improvement in Asia and EEMA regions. Does that mean -- I mean, it sounds like that's mainly -- you're seeing better macro trends in Russia, your growth in Indonesia. Are there any other specific positives that you are calling out in those 2 regions?

Hermann G. Waldemer

Well, we just raised our prices by RUB 3 in Russia in July that flows into that one as well. But other than that, yes, I mean, the overall environment is really good. The economic environment is kind of the antipode of what we see in the EU region. And with the right portfolio, the right plans, we are benefiting from those trends in those parts of the world.

Operator

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

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

Hermann, I want to ask you 2 questions, if I could. The first was a bit of a follow-on to Japan, and it sounds like you're now expecting sort of share stabilization there for the year. And really just more a question about why. Do you have less new productivity or are you seeing a little bit more competitive activity, of course, out of Japan Tobacco? Maybe it's a combination of factors, but I just want to get a little more perspective on your expectation for share in Japan.

Hermann G. Waldemer

We had a very slight loss here. I mean, we came down from 28% to 27.8%. That's a slight loss. We are competitive people. We don't like that. But one also has to acknowledge that competitors are not asleep on the switch either. We have had a very successful launch, this Marlboro Black Menthol, as you remember. He has come out now also with successful highly mentholated products that pushed into the market, that has had some share consequence on us, but that's the second quarter. As I said, we are already out there in July. Our sales with new launches with 5-milligram and 1-milligram versions of Marlboro Ice Blast. The 8-milligram version is the one that has 1.3% share, which is after such -- that's a long period in the market of fantastic share. But competition will go on, and we're never afraid of competition. But we take also the other products serious, that's old days.

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

It sounds like it's not a change though. And so your new product introductions are plans for, say, the second half of the year though. Correct?

Hermann G. Waldemer

No, we have still more in the pipeline for the second half of the year, of course.

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

Okay. I just want to be clear on that. And then I just had a question for you, a follow-up on the EU. Obviously, we had obviously a difficult quarter this quarter, an expectation for that to improve a bit from where we were this quarter. And I want to be clear. In the second quarter, were there any -- was there any negative effect on volumes from inventory distortions or movements that made this quarter look a little worse than what the underlying results would have shown?

Hermann G. Waldemer

I mean, Germany has been comparing to the second quarter in 2011. That was up by 4.6%, and it happens to be that the Easter is in the first quarter and in the second quarter from 1 year to the next. That's just very, very technical there. So yes, there were some inventory movements in there. And typically, at quarter ends, you sometimes see intense activity of some competitors with the trades, which we don't do.

Operator

Your next question comes from the line of Rogerio Fujimori with Crédit Suisse.

Rogerio Fujimori - Crédit Suisse AG, Research Division

Hermann, you flagged the problem of illicit trade in Italy. Has the problem of illicit trade in Spain got worse in Q2?

Hermann G. Waldemer

Illicit trade in Spain should be about 10%, 12%. I would assume there, so this increase -- it's on the increase there as well.

Rogerio Fujimori - Crédit Suisse AG, Research Division

Okay. My second question, Hermann, is whether you could give us some color on the phasing of marketing spend this year. Should we expect any change to the usual skew towards second half and Q4 in particular?

Hermann G. Waldemer

No, I wouldn't expect the change in general trends there. It's really -- it's kind of a lot of activities going to the second quarter before the summer break, and then you have -- it's picking up towards year-end. That's a very normal pattern which has not changed over the years. I don't see a change now either.

Rogerio Fujimori - Crédit Suisse AG, Research Division

Okay. And my last question is just any early reading on volume trends in Brazil, both the tax churn and price increase and the minimum price.

Hermann G. Waldemer

Sorry, volume trends in Brazil, you said?

Rogerio Fujimori - Crédit Suisse AG, Research Division

That's correct.

Hermann G. Waldemer

Brazil. Okay. Well, in Brazil, you, of course, have now had -- the pricing is implemented, the tax increase was made first. All the prices are there. We do see an adherence of local manufacturers to the new minimum price of 3 Brazilian reais there, but as the minimum price is still relatively low, I think the real effect will only come with the already scheduled and foreseen minimum price increases over the years. We don't see, however, really, an improvement on the illicit product flowing in from Paraguay into Brazil.

Operator

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

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

Hermann, I would have expected L&M to do a little bit better in the EU, given that there's probably down-trading going on. What am I missing there?

Hermann G. Waldemer

Well, sometimes you can't have it all. Marlboro is doing better. I think the 2 are just linked now. But seriously, that's -- L&M did nothing wrong. The brand is going well. In Germany, the growth has -- it's still growing, but it has slowed down a little bit. But it's fine with me as we recuperated this with Marlboro. And then when you go over to Spain, well, in Spain, the declines there in Spain are actually linked to brands that absorb part of the minimum tax today there. I'm talking about brands that fell at less than EUR 3.55. This is today the kick-in with minimum tax. That kick-in actually is going to EUR 3.77 of September 1. So I look forward to that date.

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

Okay. And then in Japan, at what point do you think the innovation disadvantage that you have relative to JT right now? At what point will that start to fade?

Hermann G. Waldemer

I would say that I just admit that they have had a real hit with the highly mentholated product that has come out under Mild Seven. We have had a series of very good ones, too. We will keep on working on our new launches, and being compared to this in the market, a onetime hit does not change this plan.

Thilo Wrede - Crédit Suisse AG, Research Division

Okay. And then last question I have for you. This illicit trade picking up again in Canada, is that a cautionary tale that may be a sustainable fighting of illicit trade is much harder than some short-term successes might imply?

Hermann G. Waldemer

Honestly, to the contrary, although you might further elaborate thereafter, to the contrary, I have big hopes that illicit trade will come further down in Canada because the province of Ontario has declared that they are essentially copying the measures that the province of Québec had implemented, was it now 2 years ago, which have brought quite a bit of volume back into the legal tax-paying market. So as the enforcements in Ontario kicks in and the total illicit trade in Ontario is estimated to be about 4 billion cigarettes, so quite a bit of that could come through and the legal market could benefit from that. So honestly, I would expect the opposite going forward in Canada.

Operator

Your next question comes from the line of Vivian Azer with Citi.

Vivien Azer - Citigroup Inc, Research Division

My first question has to do with the launch of the new Marlboro line in Russia. You guys posted volume growth on the Marlboro brand in that market for the first time in a number of quarters, and I'm curious if you could give us a sense of how much of that growth was from the selling of the new products versus any kind of underlying benefit to organic volumes for Marlboro.

Hermann G. Waldemer

Yes. In the second quarter on Marlboro ClearTaste, there is, of course -- and now they talk shipment numbers. We don't talk Nielsen numbers, we talk shipment numbers. It's still, of course, a pipelining effect, bringing the product to the distributor, and from there, into wholesale and retail trade. The volume, total volume increase in the EEMA region in the quarter was 3.8 billion cigarettes. Out of that, roughly 10% has been Marlboro ClearTaste. So yes, it's there. It's some pipelining effect, but it's just 10% of the overall growth.

Vivien Azer - Citigroup Inc, Research Division

Understood. My next question again on EEMA has to do with Turkey. At your Analyst Day, you highlighted some early successes and reductions in the illicit trade, and it sounds like that was, again, a benefit onto the Turkish market in the quarter, given the acceleration you've seen there, I think 4.5% roughly year-to-date volume growth for the industry. Do you have a sense of how much volume is coming back in that market?

Hermann G. Waldemer

Yes, our latest estimate is that illicit trade has come down by about 3 percentage points, national average from 20% actually to 17%. That's our latest estimate, is that of course by definition of those estimates. So the 4% growth that you quoted, that's actually a good estimate for the full year. So I would expect the total market to be in the range of 95 billion cigarettes.

Vivien Azer - Citigroup Inc, Research Division

Wonderful. And my last question has to do with Spain. And I hate to split hairs here, Hermann, but if I think about your outlook for the full year of 10% in line with year-to-date and I look at the comps that you face, I think it implies some kind of improvement in the back half of the year because 1/2 of 11%, the market was down 19%, and then you finish the year, down 17%. So is it the VAT change or is there something else that gets you on the margin incrementally more positive that despite a tougher comp, you can maintain the trend?

Hermann G. Waldemer

[indiscernible] the price increases that we have seen, several ones that you remember. There is now -- there hasn't been a price increase now for a while, and the VAT threat has been avoided. Then in terms of comparisons, it was also a question of how much volume is within retail trades. But at the end of the day, that's the best estimate we have coming out of the Spanish market. Can it be 11%? Can it be 12%? It could, but we talk something around 10% for the full year.

Operator

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

Erik A. Bloomquist - Berenberg Bank, Research Division

I'd like to ask about the plain packaging, and I'm wondering if there's a difference in the WTO challenge, having the Dominican Republic file a complaint. Does this mean that there's more momentum in the formal adjudication panel? And then secondly, is there any reek through from that to what may happen in the U.K. with the consultation underway and then perhaps with the results some time toward the end of this year, beginning of next year?

Hermann G. Waldemer

Okay. I mean, on plain packaging, you have actually mentioned 2 of the 3 developments in that area. The WTO claim of the DR that has now officially filed a request for consultation with Australia, actually, I believe yesterday or the day before yesterday. That adds another country and it adds more pressure into the procedure. We continue to be optimistic that more countries will actually follow that example, so that put simply more weight into the WTO claims between those governments. On the U.K., the extension of the consultation period by another month now to mid-August because that was supposed to end mid-July, is simply driven that a lot of people have made submissions and continue to make submissions to the government. I take it as a sign that the government is serious about their evaluation efforts in their houses. And if that is all happening on a rational basis and continues to think that this is the case, then I would also expect that the U.K. government comes to the same rational conclusion as they came 2.5 years ago not to implement. The third new element, the new one is actually under the bilateral investment treaty claim that Philip Morris has. The first procedural hearing is actually now scheduled for July 30 in Singapore.

Erik A. Bloomquist - Berenberg Bank, Research Division

And then coming back to the Turkish markets, could you update us on the outlook for any tax increases at the end of this year, beginning of next year? Are they thinking about raising the ad valorem again or is that somewhat off the table?

Hermann G. Waldemer

Okay. Remember, when we were here at the first quarter call, there, we have had the [indiscernible] of the Finance Minister and the Deputy Prime Minister that will address the excise tax structure. That has happened. The Council of Ministers has authorized specific tax to be implemented to an amount of up to 20% of the minimum excise tax. The timing and the actual percentage and amounts, that's still to be defined, but I would expect it still this year. So I think that is a positive development and a sign of rationality in the [indiscernible].

Operator

Your next question comes from the line of Ann Gurkin with Davenport.

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

I was wondering if you could just help me with the Marlboro brand franchise. We saw volume flow sequentially from Q1 to Q2, and we saw good share of growth continuing in Q2. But how should I think about that franchise in the second half, the impact of market pricing innovation? Can you just help me think about volume and share progression as the year unfolds?

Hermann G. Waldemer

Well, first of all, I mean, really, I mean, not even the [indiscernible] year-to-date. Yes, for Asia, I have to pick the hurdle out. But excluding the hurdle in Asia, Marlboro is up 0.24 to 6.2%. That's all year-to-date June numbers. In the EU, it's up 0.3 to 18.4. In EEMA, it's up 0.1 to 6.9, despite still measured by Nielsen declines in Russia. Latin America, up 0.4 to 14.2. So yes, it's growing. It's also growing in terms of shipments. So even year-to-date, excluding -- including the hurdle, it's up 1.7. Excluding the hurdle, it's up 2.9. And if I then move over to really to the big markets, where it's really substantially up, then you have there -- first of all, I would think of Mexico. It's growing -- I mean, the quarter, 1.2 percentage points to 53.2. I mean, the brand is in terrific shape there. It's growing by 0.9% in Poland. In Poland, you see a filament that the top 10 brands really capture more and more of the market volume, and you see a consolidation into fewer brands. That's clear up early potential for us and for Marlboro with some element there. Germany, we talked about earlier on the call. Italy, it's growing despite recessionary environment. And 0.3 percentage point to 4.5 in Indonesia, given the size of the Indonesian market, it's quite some volume. Then you go to those markets where Marlboro is actually down, and there are very specific reasons in there, understandable reasons, which are not there to be forever. Korea, it's down 0.9 to 7.7, while that is clearly driven by our price increases that we implemented and we compare still to the periods that we had price advantage versus international competitors as far as the Korean competitors. In France, it's down 0.8 in the quarter to 25.2, very simply driven by the fact that Marlboro is the only big brand who is retailing at a buffer EUR 6. There are a lot of brands retail below EUR 6. As I mentioned earlier, there's a price increase coming up in France. And in Spain, the decline in such a recessionary environment, what else could we expect? But take it all together, driven by the innovation, driven by new campaigns, driven by better execution on the marketing and sales level, a new commercial approach, Marlboro is doing well. Objects of weakness like Russia exists, and we work on those. I'm very positive on Marlboro overall.

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

So tracking where you are what to expect for the year. Is that fair?

Hermann G. Waldemer

Could you say again? I could not hear.

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

Is it tracking in line with expectations for the year Marlboro overall for the first half?

Hermann G. Waldemer

Absolutely. Yes.

Operator

Your next question comes from the line of Chris Ferrara with Bank of America.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Hermann, just one last clarification on the EU. Not to beat this thing to death, but it does sound like you're indicating broadly across the segment that I guess the first half volume numbers may be a better indicator of what the go forward looks like than are the Q2 numbers, right? Even though it looks like things have continued to worsen, especially from a macro perspective, and the number was a little worse than you even thought a month ago. So I guess can you, I guess, give a little bit more color on what the inventory/timing piece of the EU is that will cost Q3 and Q4 to get better than Q2? I'm just trying to understand why we think that, that first half number is a better indicator than the more recent Q2 number.

Hermann G. Waldemer

Well, I mean, there is many markets in there. And as I said earlier, Germany is just -- I think it's the most flagrant example there. I mean, you had Q2 down by 5.2, whereas year-to-date, it's down by 1.3. And now full year estimates for the German market is down 1.5. So you have this technical reason in the second quarter where in Q2 2011, you compare to an up of 4.6%. These are comps. Let's not get hung up too much really on quarters. Year-to-date trends are the more reliable indicator. I'm not talking [indiscernible] here. Yes, EU region is not easy, but there is no reason to believe that the EU region is now going to be down 10% for the rest of the year. It's not going to be down 10% for the year, it's going to be down in the range of where year-to-date is, which is anything around 6.

Operator

Your next question comes from the line of Michael Avery with CLSA.

Michael Avery

One quick question. You had said your estimate for the increase in leaf cost was around 2% for 2012. Has that changed at all with the drought in the U.S.? Is there upward pressure on that?

Hermann G. Waldemer

No. I mean, what we see there really is about 2%, 2.5%. 2.5%, I think, is the most realistic number of the kilo prices going up. The drought in the U.S., I mean, this is a worldwide business. One individual geography does not change total trends. So maybe marginally but not substantially.

Michael Avery

Okay, that's helpful. And then you had cited Thailand and Vietnam is a couple of the drivers for growth in Asia. Those are obviously relatively small markets for you, but can you give a little color on what's going on there? Were they up quite a lot that it would be worth mentioning? And what sort of growth that you've seen there?

Hermann G. Waldemer

Vietnam, remember, we have kind of restructured a bit a business set up there last year, which has given us a better influence on marketing and sales of our products. We are actually from a very low place, almost doubling volumes in that market, but [indiscernible]. We concentrate on the 5 or 6 big cities. The best example that highlights the future growth potential is actually that in the city of Hanoi, we now have a market share of about 15%. So there's plenty of possibility going forward. Thailand is a bit more volatile environment where we are up against a well-protected Thai monopoly. But we have good trends there, but it's a bit more complicated there, I would say.

Michael Avery

Well, that's helpful. And lastly, just in Indonesia, obviously, the volume growth there is very strong. What kind of pricing again did you see in the quarter?

Hermann G. Waldemer

In Indonesia, [indiscernible] implement pricing in Indonesia is actually that we increased several times over the year. That can be anything between 5 to 8x on average per year. Our trading price is into the wholesale trade. So it's not like in many other places where you have whatever an excise increase in the morning, then after, all the prices changes. So Indonesia has constant pricing throughout the year.

Michael Avery

So that just continued like normally [indiscernible]?

Hermann G. Waldemer

Yes. There's nothing particular there.

Operator

Your next question comes from the line of David Hayes with Nomura.

David Hayes - Nomura Securities Co. Ltd., Research Division

Two, if I can. Just came about to this, the guidance not changing. Obviously, as you made the point, it was a little bit worse since we saw you in June. The currency obviously a little bit worse as well. Could you be a little bit more specific about which markets have got better over the last, I guess, 4 to 6 weeks that leaves you confident that you're still in that range? Or is that a little bit of comfort baked into the previous guidance and you're just not through that level yet? And then secondly, just following up on the Indonesian point. Clearly, that's been a huge successful year in terms of the market but your market share performance. Are you seeing anything from competitors in terms of trying to arrest that market share momentum that you seeing? Or would you be confident that, that will continue, given what you're doing there through the second half in terms of market share?

Hermann G. Waldemer

Let me start with Indonesia. As I said [indiscernible] before, I mean, we don't -- nobody can expect continued share growth in the range of 3 percentage points all the way along. We have said that this is going to slow down a bit. But that being said, I'm just convinced that we have the best company there, we have the best brands, we have great management, we have great employees, we have great distribution. They're just doing extremely well. And overall, the pricing environment is rational, the government, yes, is increasing excise taxes every year but has not done this for years in a disruptive manner. So the elements are all there for a very positive performance to continue in the Indonesian market. And then for your first question on the overall guidance, I mean, let me answer that way. We are all very pleased to see that our Asian growth engine is now complemented by very strong performance also in Eastern Europe.

David Hayes - Nomura Securities Co. Ltd., Research Division

Okay. Is that Russia? I mean, it sounds like the presentation in the release that maybe Russian trends were stepping up a little bit in the last and then I guess your performance within that with the investment behind Marlboro. Is that one of the key markets to your point that's going to go better than you were hoping for over the last couple of months?

Hermann G. Waldemer

Russia, by its sheer size, of course, is the most important market in the EEMA region. But there is also Turkey, there is also Ukraine, there is Kazakhstan, there is North Africa, there is the GCC countries, which are also very prosperous countries. There's growing population and growing purchasing power. So there are many places in that region. Of course, Russia is the most important [indiscernible] many others.

Operator

Your next question comes from the line of Karen Lamark with Federated Investors.

Karen Lamark

Just wanted to go back to the EU and ask you to comment on how you see the balance of volume and pricing in light of apparent increase in price elasticity and the illicit trade. And really, what I'm trying to get at is whether or not these conditions and competitive dynamics might warrant to the change in thinking about pricing, particularly if macro pressures seem, as they do, seem likely to persist.

Hermann G. Waldemer

Honestly, I don't think so because when it comes to pricing, then the first thing you need to think about is excise tax, and governments all across Europe have been rational. I think there can't be a more convincing example of the very recent one in Spain that disruptive measures do not maximize excise revenues, but regular moderate steps maximize excise revenues. That is, at the same time, the best not only for the governments, but also the best for industry competitors like ours. So I do not see a change in the rational environment. You have seen a continuation of that rational environment. If you look back over the last 2 years, the European crisis is already going on for a little longer and then the last 6 months. And I see no sign by that all of a sudden would turn and change into an unreasonable environment. I can't see that.

Operator

Your final question comes from the line of Thomas Russo with Gardner Russo & Gardner.

Thomas Adrian Russo - Gardner Russo & Gardner

My 2 quick questions. Can you spend a second talking about the role of Lark in Japan? It seems like the brand that's most impacted by the Japan hurdle and tell us about the strength of Lark and the innovation of Lark in Japan. And then the second question was just to look for an update, any kind of narrative on the next generation of products that you kept us to recently and whether there's anything newsworthy.

Hermann G. Waldemer

Okay. I mean, on Lark in Japan, let me put it this way. Lark is more of a traditional brand, more of a Japanese brand, as funny as it might sound. And that's why it's probably a little bit more vulnerable than a truly international brand like Marlboro is, that's why successful launches of competitors, as the one I was quoting, probably is putting more of it into a Lark that it eventually could put into a Marlboro. That being said, it has been a big growth driver last year. So everything has 2 sides. So we just have a lot of additional smokers into Lark during the special situation, the crisis of last year. In terms of NGPs, there's really nothing new to report compared to our presentations that we had. It's our Investor Day, really, only a month ago.

Operator

That was our final question. I'd now like to turn the floor back over to management for any closing remarks.

Hermann G. Waldemer

Okay. I'd like to close with some personal remarks here. It was an exciting journey over the last 5 years, which started with preparing the spinoff, the spinoff itself, and then life as an independent company. Quoted at the stock exchange has been a wonderful period of my life. It was a great pleasure for me to work with you all. And more importantly, we get to know you, the analysts following our company and many of our investors. Let me thank you for your confidence and trust over these years. I will certainly remain a shareholder of PMI because it's simply a superb company, and I hope to get a chance to see you again in the future. Thank you, and all the best to all of you.

Nicholas Rolli

Hermann, thank you very much, and let me add my personal congratulations and best wishes to you. Certainly, on behalf of the Investor Relations team, we appreciated everything you did for us, your support, your commitment, your wisdom, your friendship, and we wish you nothing but the best in your retirement. So congratulations and thank you.

And that, well, thank you, all, for joining the call as well. That concludes our call. If you have any follow-up questions, you can contact the PMI Investor Relations team in Lausanne. Thank you. Have a great day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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