Nick Rolli - Vice President, Investor Relations and Financial Communications André Calantzopoulos - Chief Executive Officer Jacek Olczak - Chief Financial Officer.

Matthew Grainger - Morgan Stanley James Bushnell - Exane Judy Hong - Goldman Sachs Bonnie Herzog - Wells Fargo Chris Growe - Stifel Michael Lavery - CLSA Vivien Azer - Cowen & Company Erik Bloomquist - Berenberg Owen Bennett - Nomura.

Good day. And welcome to the Philip Morris International Fourth Quarter 2014 Full Year Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Philip Morris International management, and the question-and-answer session.

[Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of the 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..

Welcome and thank you for joining us. Earlier today we issued a press release containing detailed information on our 2014 fourth quarter and full year results. You may access the release on our website at www.pmi.com.

During our call today, we’ll be talking about results for the fourth quarter and full year 2014, and comparing them to the same period in 2013 unless otherwise stated.

A glossary of terms, data table showing adjustments to net revenues and OCI for currency and acquisition, asset impairment, exit and other costs, 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 website.

Please note that reduced risk products, or RRPs is the term we use to refer to products with the potential to reduce individual risk and population harm in comparison to smoking combustible cigarettes. 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?.

Thank you Nick, and welcome ladies and gentlemen. We anticipated that 2014 would be a particularly difficult and complex year for PMI and had in fact characterized it as an investment year.

We aimed to address specific challenges in key markets such as Italy, Japan and the Philippines, while also investing behind a number of strategic initiatives, including the pilot launches of iQOS, the roll-out of the Marlboro 2.0 Architecture and the optimization of our global manufacturing footprint.

In addition, we faced an operating environment of continued macro-economic weakness and unprecedented currency headwinds. Within this context, I am very pleased to announce that we delivered a solid currency-neutral performance in 2014, achieving adjusted diluted EPS growth of 7.8%.

This result exceeded the 6.5% to 7.5% guidance that we provided last November, due mainly to better than expected performances in the European Union and EEMA regions. In addition, we made very substantial progress in addressing our specific key market challenges and successfully executed on our strategic initiatives.

As anticipated, our fourth quarter results came in below our exceptionally strong performance in the fourth quarter of 2013. In addition to this challenging comparison, the pattern of our expenses and the timing of key investments in 2014 were skewed towards the final quarter.

Our organic cigarette volume declined by 3.8% for the quarter, due to lower total cigarette industry volumes and inventory movements in the Asia and EEMA regions, partly offset by market share gains in the EU and EEMA regions. Excluding the adverse impact of inventory movements, volume for the quarter declined by approximately 2%.

Net revenues increased by 1.1%, excluding currency and acquisitions, with favorable pricing across all regions that more than offset unfavorable volume mix due principally to the Asia region. Adjusted OCI declined by 10.6% on the same basis, due mainly to the aforementioned pattern of expenses and timing of investments.

Fourth quarter adjusted diluted EPS, excluding currency of $1.31 decreased by 4.4%, compared to a 19.4% increase on the same basis in the fourth quarter of 2013. Despite a historically high adverse currency headwind, we enter 2015 with strong business fundamentals and accordingly, remain optimistic regarding our business prospects going forward.

Consequently, this year we are targeting currency-neutral annual growth, excluding acquisitions of 4% to 6% for net revenues and 6% to 8% for adjusted OCI. Our reported diluted EPS guidance for 2015 at prevailing exchange rate is in a range of $4.27 to $4.37 versus $4.76 in 2014, and includes an unfavorable currency impact of approximately $1.15.

This guidance represents a growth rate excluding currency, of approximately 8% to 10%, compared to our adjusted diluted EPS of $5.02 in 2014. As I will explain later, our 2015 guidance includes incremental spending versus 2014 for the deployment of iQOS and does not include any share repurchases.

The $1.15 of unfavorable currency at prevailing exchange rates, included in our 2015 guidance, is driven primarily by the Russian Ruble, the Euro, the Japanese Yen and the Indonesian Rupiah. These four currencies account for approximately 42%, 13%, 11% and 5%, respectively, or over 70% collectively, of the total unfavorable currency variance.

We have currently hedged approximately 60% of our 2015 forecast sales to Japan, which at prevailing exchange rates translates to an effective rate of 110 Yen to the U.S. dollar. Let me now discuss our progress in some of our regions and key markets, beginning with the marked improvement in the EU region.

Total cigarette industry volume was down by 2.4% in the fourth quarter, bringing the full year decline to 3.1%.

This represents a significant moderation versus the 7.4% decline in 2013, which we attribute to the subdued performance of the e-vapor category, less out-switching to fine cut products, a reduction in illicit trade in several markets and lower than historical average pricing mainly in Italy.

For 2015, we forecast a decline in industry -- in cigarette industry volume of approximately 4%. Our 2014 market share performance in the EU region was impressive, with a gain of 1 percentage point to 39.9% in the fourth quarter and 1 point to 39.8% for the full year.

This result reflects share growth in all six of the region’s largest markets by cigarette industry volume, most notably in Italy and Poland. In fact, our share gains in conjunction with the moderating industry volume decline resulted in essentially stable PMI cigarette volume in the EU region last year.

This is a remarkable achievement and by far, the region’s best cigarette volume performance since the spin. Marlboro, L&M and Chesterfield were the primary drivers of our share performance in the EU region. As of 2014, they represented the top three cigarette industry brands in the region by volume.

For the year, Marlboro share grew by 0.3 points to 19.3%, L&M by 0.2 points to 7.1% and Chesterfield by 1.1 points to 5.5%. The performances of Marlboro in France and Spain, L&M in Germany, and Chesterfield in Italy and Poland were of particular note.

For 2015, we expect the EU region to return to low single-digit adjusted OCI growth, excluding currency and acquisitions. The excise tax environment remains rationale. Our leading brand portfolio positions us well for further share gains, driven by the continued rollout of the Marlboro 2.0 architecture.

In addition, pricing is expected to be stronger than in 2014, in part due to recently increased cigarette prices in key markets such as Italy, Poland and Spain. Let me briefly discuss the U.K. Government’s recent announcement that it intends to proceed with the introduction of plain packaging.

We believe this decision is ill-advised and is not based on scientific evidence. While we maintain an ongoing dialogue with regulators and hope that reason will ultimately prevail, we are prepared to pursue other alternatives, including litigation, to ensure the protection of our intellectual property.

Before closing on the EU Region, I would like to touch briefly on Italy, where the long-awaited tax reform was implemented last month. As shown on this slide, it includes a shift to a more specific structure and a higher minimum total tax, both important steps in the right direction.

The reform also covered Reduced-Risk Products, with Marlboro HeatSticks now subject to a lower excise tax rate compared to cigarettes. We enter the year with favorable share momentum, driven by the strong performance of Chesterfield, and in mid-January we increased our cigarette prices by €0.20 per pack across our portfolio.

I will now discuss selected markets from our Asia Region, beginning with Japan. Our strategy to stabilize market share last year was successful. Key drivers were the launch of our Be Marlboro marketing campaign, the introduction of Marlboro Clear Hybrid and the strengthening of the Lark brand family through morphing and new launches.

We plan to maintain our focus on these two key brands in 2005 [sic] [2015] through a robust innovation pipeline, as highlighted by the recent launch of Marlboro Fusion Blast, a menthol cigarette with two different capsules that provide novel taste sensations.

And, of course, Japan was the first market to introduce iQOS, with its pilot launch in Nagoya last November. We plan to expand nationally in 2015. Industry volume in Japan declined by 3.4% in 2014, consistent with our projected 3% to 3.5% decline range. For 2015, we forecast that the decline will moderate to a range of 2.5% to 3%.

In Indonesia, industry volume was up by 1.9% in 2014 to 314 billion units. This growth was driven by a 7.5% increase in the machine-made kretek segment, which now accounts for approximately 74% of the total market, partially offset by a 13.1% decline in the hand-rolled kretek segment.

Our market share grew over the course of 2014 and reached 35.3% in the fourth quarter. This sequential improvement was driven by our strong performance in the machine-made kretek segment, due mainly to Dji Sam Soe Magnum and the successful launch of Dji Sam Soe Magnum Blue in April of 2014.

We now hold approximately 30% share of this growing segment, led by our flagship brand Sampoerna A. There has been a significant moderation in the volume decline of our hand-rolled products, as competitive brands have followed Dji Sam Soe above the important 1,000 Rupiah per stick price point.

As hand-rolled products face a significantly lower excise tax increase in 2015 than machine-made products, this bodes well for the segment, where we are the market leader. We forecast cigarette industry volume growth in 2015 of up to 2%, although the market will remain sensitive to fuel and commodity prices.

While the Philippines continued to be a challenge and a drain on our 2014 income performance, we have recently witnessed significant positive price movements at the lower end of the market.

After we raised the recommended stick price of Jackpot from 1.25 Pesos to 1.50 Pesos in October, our main competitor increased the recommended stick prices of its brands by 0.25 pesos in December and further increases have occurred since then.

This has reduced the stick price gap to Marlboro from 1.75 Pesos in January 2014 to between 1 Peso and 1.25 Pesos currently. We believe that the introduction of tax stamps will further improve the competitive environment in a market where cigarette consumption remained resilient last year at around 100 billion units.

These developments augur well for profitability to improve over the mid-term and we remain bullish on the prospects for this market. I will finish my discussion of the Asia Region with a brief update on Korea. The 120% increase in total tobacco excise taxes effective January 1st will be disruptive given its impact on the average retail selling price.

To pass the tax on, we increased the retail price per pack for both Marlboro and Parliament by 1,800 Korean Won, or approximately 67% to 4,500 Korean Won. For 2015, we forecast a decline in the underlying cigarette industry volume of approximately 20% to 25%.

From an income perspective, however, the tax increase should not have a material impact on our business performance this year, due to a gain from inventories that we were able to build prior to the tax change. Let me now turn to Russia, where we performed exceptionally well in 2014.

Market share reached 27.1%, up by one full share point versus prior year. Our share growth was driven by the strong performance of above-premium Parliament, mid-price L&M and low-price Bond Street, which positions us well for further expansion in 2015. Cigarette industry volume decreased by 9.2% in 2014, in line with our forecast of 9% to 10%.

The decline was due primarily to significant excise tax-driven retail price increases, which averaged around 22% for PMI. These price increases helped us boost our unit margins and total profitability in the market, despite a 3.5% lower volume.

For 2015, we forecast a decline in total cigarette industry volume of 8% to 10%, due to excise tax-driven price increases and a deteriorating macro-economic environment. Moving on to our brand portfolio, Marlboro was a key driver of our continued global market share momentum in 2014, with growth of 0.3 points in both the EU and EEMA Regions.

The brand’s performance was particularly strong during the fourth quarter, with share growth in all four Regions, providing positive momentum heading into 2015.

Marlboro’s share growth was driven by the successful initial rollout of architecture 2.0 in 26 markets, starting in the EU Region, and the expansion of the Be Marlboro marketing campaign to additional markets.

Beyond Marlboro, we are very pleased by the strong 2014 performances of our other key international brands, which demonstrate that our investments behind them are clearly paying off.

Of particular note was the continued robust growth of above-premium Parliament, with cigarette volume up by 5.6% versus 2013 and notable share gains in Russia and Turkey. Chesterfield had an exceptional year, with cigarette volume growth of 22.6%.

In addition to its success in the EU Region, which I covered earlier, the brand grew cigarette volume in all other regions. L&M was also a success in 2014, with cigarette volume essentially stable or growing in three of our four regions and notable share gains in Germany, Russia and Ukraine.

The unparalleled strength of our brand portfolio provides us with significant pricing power. 2014 was another robust year on this front, with a total pricing variance of $1.9 billion. This is in line with our historical annual average and was driven by the EEMA and Latin America and Canada Region.

For 2015, we foresee our pricing variance remaining broadly in line with that of last year. Please note that, as of today, we have implemented or announced approximately 70% of the pricing that is included in 2015 EPS guidance.

We continue to focus vigorously on our cost base and in 2014, exceeded our gross productivity and cost savings target of $300 million, with significant savings related to specification rationalization and procurement.

In 2015, we anticipate that our productivity and cost savings program, combined with savings associated with the manufacturing footprint initiatives that we implemented in 2014, should result in a total company cost base increase, excluding RRPs and currency, of approximately 1%.

Turning now to our RRP portfolio, 2014 opened a groundbreaking new chapter in the history of our company with the commercialization of iQOS in Nagoya, Japan, and Milan, Italy. As a reminder, neither pilot launch is being made with any health claims. The marketing focus is on innovation and product benefits, such as no ash and less smell.

Although, it is still too early for a comprehensive quantitative assessment, I’m very pleased to share with you that both adult smoker and trade response is very positive and that the performance of iQOS is in line with, or exceeds key indicators that we established. We should be in a better position to provide data around the middle of this year.

In Nagoya, total iQOS device sales are well ahead of projections and growing steadily every week. Sales of HeatSticks are also growing sequentially, but quite naturally do not yet reflect high rates of full conversion.

However, as critical mass and product normalization build up over time, we would expect these rates to be in line with our 2013 whole offer test results. Based on our latest estimates, iQOS awareness amongst adult smokers has reached approximately 34% and adult smoker profiles are on target. Furthermore, the iQOS flagship store concept is a success.

Our logistics chain is working well and product defect and return rates are much lower than we had anticipated. In Milan, where the selling channel is limited by design to a subset of the tobacconist universe and consumer communication is severely restricted. iQOS device penetration has, as expected, lagged that of Nagoya.

However, HeatSticks sales reflect a higher full conversion rate, consistent with the characteristics of the market. Based on our latest estimates, iQOS awareness amongst adult smokers has reached approximately 16%. Other indicators are in line with Nagoya. In both markets, Marlboro HeatSticks are subject to a lower excise tax rate than cigarettes.

Given the positive initial performance of iQOS, we are confirming our plans to commence national expansion in Japan and Italy, as well as pilot or national launches in additional markets later this year.

These launches will be supported by a new release of iQOS that incorporates feedback from the pilot market and features a variety of colors and textures to broaden the product’s appeal amongst adult smokers. Our 2015 guidance includes incremental spending versus 2014 for the deployment of iQOS, which is skewed towards the second half of the year.

We continued to reward our shareholders generously in 2014, despite a significant currency headwind that adversely impacted our free cash flow by $1.6 billion. Last September, our Board of Directors approved an increase of our dividend by a further 6.4% to $4 per share on an annualized basis.

This represents an increase of approximately 117% since the spin-off in 2008 and equates to a dividend yield of 5% based on last Friday’s closing share price. In 2014, we paid $6 billion in total dividends to our shareholders and spent a further $3.8 billion to repurchase 45.2 million shares.

We are currently operating in a debt level corridor that is close to the maximum that would still allow us to maintain our single-A credit rating.

We remain committed to returning around 100% of our free cash flow to our shareholders, and are taking appropriate measures to further reduce our working capital and keep capital expenditures flat despite the expansion of RRP.

At prevailing exchange rates, the adverse currency impact on our 2015 net earnings would be approximately $1.7 billion, which consequently will impact free cash flow. Furthermore, the currency environment remains extremely volatile.

In this context, we are focused on managing our cash flow prudently and maintaining financial flexibility for business development opportunities. Consequently, we do not currently envisage any share repurchases in 2015 and this is reflected in our guidance.

However, we will revisit the potential for such purchases as the year unfolds, depending on the currency environment. In conclusion, we enter 2015 with confidence in our business outlook.

We delivered a solid currency-neutral performance in 2014, with adjusted diluted EPS growth above our guidance and successfully executed on a number of our key strategic initiatives that will generate attractive returns in the years to come. We also made substantial progress in addressing market specific challenges.

Our business is supported by strong fundamentals and positive momentum. Our leading brand portfolio is driving continued robust pricing and market share gains, while our vigorous focus on our cost base, notably through the optimization of our manufacturing footprint is enhancing operational efficiency.

These strong fundamentals are enhanced by our investment behind reduced-risk product. We are excited by the prospects for iQOS and are pleased by its performance thus far. For 2015, we are targeting currency-neutral annual growth, excluding acquisitions of 4% to 6% for net revenues and 6% to 8% for adjusted OCI.

We are further targeting growth in adjusted diluted EPS of 8% to 10%, excluding currency. These targets are a clear reflection of the strong confidence that we have in both our business and the outlook for the year, particularly given our incremental spending behind the deployment of iQOS. Thank you.

Jacek and I will now be very happy to answer your questions..

Thank you. [Operator Instructions] Our first question comes from Matthew Grainger of Morgan Stanley..

Hi. Good afternoon..

Hi, Matt..

Hi. Thanks. Just two questions. One, I wanted to ask a bit more about Japan to better understand the inventory reduction there.

Is that a function of how retailers are temporarily managing levels across manufacturers? And consequently, is that a timing issue that could reverse next year, or was that just the lag result of some of the share losses you’ve seen in over 2013 and earlier this year?.

Okay. To put this inventory movements in context, we should all remind -- remember that we had to close better than to resume during last year. And this is an $80 billion plus cigarette factory and consequently, we had to prepare for the closure and also move production to a number of other factories.

We had to build in a particular case of Japan, some safety stocks but not only in the case of Japan during the year. And some of these inventories had to carry through the year end and will come back in 2015.

For the particular case of Japan, however, the objective for the year was to adjust inventory hurdles to both the market decline in 2014 and anticipate it for 2015 and in addition to that to our lower market share. Okay. And the vast majority, clearly of these adjustments as we right sized will not come back.

And as I said, because of maintaining some safety during the year, we had to do this adjustment in the last quarter. So that’s basically the whole story..

Okay. If we are trying to put that in context, I think your many investors will look at the flat adjusted operating profit performance this year. And the expected acceleration back to 6 to 8 next year and view that as a fairly high hurdle.

If we are trying to look at the some of the moving pieces that will shift from year-to-year, those inventory reductions in Japan over the course of the year that you sort of purposely of course corrected on, how much of a drag was that on this year’s full year adjusted -- total company adjusted operating profit?.

I think the inventories in the last quarter, I can’t quantify exactly, I appreciate, but probably 1 point..

Above the 1 point in our growth rate throughout the year. 1 point..

On adjusted basis, what was our volume development in the fourth quarter, I mean, we read it, André read it in the remarks. So, yes, there was a drag clearly coming from this rescheduling of a supply chain and the subsequent inventory..

Okay. That’s helpful..

The key positives for the year, clearly is the improvement in the Philippines. I think that was big, I think issue we had in 2014. We -- I think we stabilized in any case the share at Japan that was even bigger, better than the inventories. I think the business in Europe is doing fine.

So I think we fix the issues we had announced we need to fix in 2014. And we’ve just behind that. I think we can look with optimism into 2015 and that clearly explains the swing we have in terms of OCI growth..

Okay. Thanks André. And just Jacek, perhaps with respect to the dividend, I know this is a hypothetical question and you may just prefer not to address it.

But the payout ratio is obviously extremely high right now, are there any guidelines you can provide on how you or the board would react if currency headwinds pushed the payout ratio even higher on a reported basis? Would the goal under those circumstances be to sustain some level of ongoing dividend growth even if that was only modest if you had, let’s say, 100% payout ratio?.

I can answer that question but I think André would be even more enthusiastic about answering this question..

Look we all understand there is huge currency volatility in 2015 and we have to be bit cautious. And clearly, dividend is more prerogative as you know very well.

But I understand where your question points to or points at and I see a no scenario under which we will reduce the dividend in 2015, okay, even if we have to temporarily stay at a very high payout ratio..

Okay. Okay. Thank you both..

Our next question comes from the line of James Bushnell of Exane..

Hi. Good afternoon. Thanks for taking my question. Just a follow-up a little bit on the last point, so you mentioned that the stock production in Japan took points of OCI growth in Q4. I’m thinking about Asia because that’s clearly where you have the most weakness in the quarter.

I wondered if you could give us a feeling of the moving parts there? So was Australia the biggest drag on your profits? And I know there are some other things at the Philippines and you had some investments.

So I just wonder if you’d help us think through what the big drags are there and then that would help in terms of modeling going forward? Thanks..

Well, I think you mentioned them. Clearly, Australia was a big drag compared to 2013. And we had Japan overall as we said at the beginning of the year because we expect a lot of share at the time of the inventory adjustment, clearly, Japan would be another drag.

Now, we’ve stabilized our share and quarter-to-quarter daily, Japan, on an underlying business basis is rather stable but where to make the timing of this inventory in Japan as I explained previously because we had to maintain certain safety stocks until the whole situation of Bergen op Zoom closure is resolved.

So I would say its Australia and clearly, partially the Philippines. Don’t forget that in the Philippines, we increased prices ahead of main competitor there plus during the year we had to absorb partially excise tax. Now the good news about the Philippines is that we had the price movement at the bottom of the market.

Prices per stick now of virtually any brand that comes are 2 or above, our price gaps are reducing. So the Philippines definitely are now going to be of any negativity and if any, they will turn positive this year and I think that’s an excellent develop, but we have to watch the situation that really carefully.

But so far so good, I mean, I feel much better now, as I say, six months ago and three months ago, I can tell you..

Okay. Thank you.

And I wonder if you could comment also on the how you see the outlook in Australia this year, please?.

It is early day, first of all, in Australia, the market decline is 10.6%, but if we correct for inventory movements 2013 to ’14, the underlying is roughly [4.6 points over there] [ph]. And as we know, this is entirely driven by the excise driven price increase that are pretty substantial in Australia.

I think we know about the issues in Australia is the growth of the low price that the deep discount segment and some competitive activities. So we said that we have to put in place a strategy to extend the growth and I think our pricing strategy that is currently in pace is bring results.

We see a slight deceleration of the deep discount segment, part of this is -- technical part of this is real. But I would not say, yes, that we can declare that the deep discount segment has stabilized. But sequentially looks like it doesn’t grow any more at the pace it used to be.

We also see some positive price movement at the bottom end of the market. That’s good news. Business will be confirmed, because if there is price movement, it’s good, but we have to see how much of that is discounted back, if that sticks, this is also a positive development.

Overall, I -- our estimate is that it’s unlikely that Australia will contribute positively to our OCI growth this year, but definitely we don’t anticipate this to be the kind of marginal drag that we had in 2014, okay. So it’s early days. We will see how the next three, four months unfold. I don’t know if I answered your question..

Okay. No. It does. That was great. Thank you very much..

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

Yeah. Hi, André and Jacek..

Hi..

Hi..

So, maybe, first on FX, I guess, just maybe given the really the heightened level of FX volatility, can you talk about if there any plans to perhaps better align your revenue and cost structure in some of your key markets like Russia, Japan, and even your exposure to Swiss franc?.

I think we look at our cost structures constantly and we are focused on improving productivity and efficiency. And I think that indication we gave that total cost excluding RRPs are going to grow by normal than 1%. It’s a clear sign that we are very focused on these items. Now every market is particular and Jacek will elaborate a bit more on this.

But as a matter of principle, in many markets we have costs that are in local currency, but we also have costs that are in euros or in dollars, like tobacco, leaf and certain materials. And clearly rebalancing that cost structure is a bit more difficult.

But today, I would say that in the vast majority of the market, even in Russia we are not dollarized in terms of the cost basis we have and agreements we have with the parties other than the materials I explained. So we see a reduction in the cost base as well as currencies devalued..

You are absolutely, right. Judy, one thing which maybe will help looking at the same $0.80 EPS, negative variance is the currency net in '14, the transaction impact, negative transaction impact is just in a range of 10% of this total amount. So most of the impact which we are incurring is coming from translations.

And to André’s point, if I take the largest individual market on net profitability per market we take Indonesia, Russia and we have a local cost, this in a range of 65% to 75% in total cost. So this is COGS in all discretionary marketing overhead etcetera spend.

So we have obviously there quite a significant portion of the natural hedges for the cost structures already building, but as I said earlier, the impact on us is mainly coming from a translation..

Okay. That’s helpful. And then just maybe looking at Russia and the industry volume was down 9.2% in 2014. Your volume actually did a lot better down 3.5%. I think you are commenting on 2015, industry being down in that 8% to 10% range.

So my first question related to that is your confidence in keeping your volume decline much more modest versus the industry and obviously that implies continued market share in that market? And then secondly given that the tax increases in 2015 in Russia is more modest.

Do you think that 8% to 10% volume decline is more representative just the macro pressures that you are experiencing in that market? And related to that just comment on how you are seeing sort of the pricing in that market and the consumer’s ability to absorb cigarette price increases in a pretty inflationary market?.

Okay. We had very, very good year in Russia in 2014 and I believe the portfolio fundamentals were plus the initiative should maintain a share growth momentum. Now whether this can fully compensate volume or not, this has to be seen, okay. The second important thing in Russia is a question of pricing.

We had about 22% pricing in 2014 and November and December prices were up roughly 13% if move way above average on our portfolio which of course will carry forward almost entirely in 2016. You appreciate, I cannot comment about further price increases for the year.

But the situation in Russia we all watch it very closely, clearly a combination of the sanctions in the oil price have an impact on the economy. We start seeing inflation and quite the unknown is for the year and this is not only particular to Philip Morris is what will happen with real incomes and salary, okay.

So as you know we take pricing decision trying to balance our ways, consumer affordability, price gaps, illicit trade and clearly margin improvement and we will always pursue the opportunity within that equation.

This is -- Russia is because of the microeconomic environment we have to assume that we will have a similar decline in 2015 that we had in 2014 despite as we rightly pointed out a lower excise tax, okay. So how this will unfold, I don’t know. I will be happiest man on earth if the decline is lower than what we perceived..

Got it. Okay. Thank you, both..

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

Hi, André..

Hi, Bonnie..

I was hoping you could drill down a little further on the consumer behavior surrounding iQOS in your two test markets.

For instance, could you give us a better sense of dual usage, repeat purchase for example, and then cannibalization rates maybe on Marlboro combustible or possibly any of your other brands? And then I would also like to hear from you what was the biggest positive surprise and the biggest negative surprise from your two tests..

Okay. A lot of questions, Bonnie. First of all, I think overall we are obviously positively surprise by their performance we had.

You appreciate, I cannot disclose precise numbers for competitive reasons, but clearly our device -- our iQOS device sales were well ahead of what we had initially projected and we are talking to thousands of units okay and we are not talking small quantities. And they continue every week at a pace of 3% to 4%, so this is not bad at all.

Regarding conversion rates, it is a bit premature to measure this because as we are building a consumer base, it takes time to make the assessment and takes time for people to fully convert.

The numbers we see in terms clearly of offtake or repeat purchase and mind you some of the consumers bought cartons at the beginning, so it’s difficult to judge daily purchases of product. We see that the rate of full conversion is clearly lagging behind the amount of units we sold. But that’s natural and we expect it, okay.

We also need to understand the situation in Japan that people still have the ability to smoke combustible products in very many venues. So that’s natural that initially they use iQOS in situations like in warehouses or in office where they can’t use combustible products and mostly and slowly they will eventually convert more and more.

So I don’t have yet a sufficient database to know exactly what the conversion fully conversion versus occasional are. We will have a better reading a couple of months, but all I am saying is that the progress is pretty good and steady okay. And we should not be totally impatient and think that everybody will convert in day one.

Even with the people I go around, they took some time to convert. And the awareness of the product is right. I think the consumer profile is a target. And as I said also in my remarks, we are testing our supply chain, returns rates are much lower than we thought, although people have the option to return the products if they are not happy.

And we are learning also a lot in terms of marketing so that we can adjust our programs when we go national, but overall it’s pretty good experience.

As expected, and I said in my remarks in Milano because of less marketing freedoms and more difficult and it’s higher difficult to create awareness, we are a bit behind Nagoya in terms of absolute amount of iQOS unit sold still in thousand, but we have an apparently higher full conversion rate also because there are much more restrictions in Italy.

One particularity of Italy is that there is an initial, I would say reluctance for people who have tried electronic cigarettes to try iQOS because they had a bad experience with electronic cigarettes, but the ones who finally try and buy, they are more committed because they see the difference.

But this is more qualitative and anecdotal at this stage than quantitative. So again, good progress. We decided to go national and in few months, we will have something that is really quantifiable and of course we will communicate this to you..

Okay. That’s really helpful. And then I just have a question or I guess probably a two-part question on your margins. First, your margins in the fourth quarter deteriorated quite a bit, so could you drill down on the key drivers for this? And then in terms of '15, you mentioned your cost ex-RRP will increase 1%.

So just trying to understand what you’re hoping to achieve or accomplish with these higher costs and investments? Clearly you are making strategic investments in your business.

So how should we think about this in terms of the potential for accelerated growth in the future?.

Okay. I am referring to you the 1% refers to the entire base, okay. We should not forget that we have the benefit also this year of the manufacturing footprint improvement of last year, okay.

We also benefit with for moderating leaf prices that will continue into the future and growth price also that has been a big cost item in 2012 and '13 are also kind of stabilizing as we had good crops. So from a manufacturing perspective, clearly we are on the low end of the cost.

So that for the business, we pursue also efficiency improvement programs, but we never stop the investments that will grow the business further. And for this year clearly, we have some exciting programs on all the brands. We continue with the deployment of 2.0 Marlboro. We started with red.

We continue with Marlboro Gold and the other variance of the brands, so that continues investment. And we also essentially revamped and created new marketing campaigns for all the other key brands in the portfolio that we are also deploying and investing besides them. But as I said in my remarks, clearly, that pays dividends.

So be reassured that we don’t stop investing behind the growth of the business and I think, the market share performance has demonstrated that were the right thing to do. For the rest, as we said in -- and I said in previous intervention, our long-term objective is to always contain cost between 1% to 3% ex-RRPs.

And depending on leaf prices, I think we can even at least, for the next two years remain at the lower end of this range. So I think we are pretty happier about that.

And just to clarify on also RRPs, there is incremental investment this year compared to last year’s incremental investment and the variance is slightly above the range we had last year or the north we had last year. So it’s about 1 EPS point just the increment, okay..

Okay. All right. Thank you. That was helpful. Appreciate it..

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

Hi. Good afternoon..

Good afternoon..

Hi. Just had two questions for you if I could please. The first one, I’m just curious by André your view on, I mean, you talked about 2014 definite macro-economic effect on the business.

It would seem like that environment generally still in place in ’15? I guess, related that, I’m just curious, if you could give a general outlook for volume? And also just curious you’re seeing any mix degradation across the business, any trade down broadly that is rather than market by market, is that having an effect on the business in ’15?.

Okay. It’s difficult, obviously, to appreciate to predict total industry volume this year. I would see and I will explain some of the caveat in the 2% to 3% range, okay. This is what I mentioned previously that mid-term, I think, would return to 1% to 2%.

First of all, we have all this currency situation that it’s very difficult to predict what precise effect is going to have on the economies around the planet. Second thing, clearly, we had to revise our estimate for the Russian market given the particular situation there. We thought that 2015 would be the range 4% to 6% roughly.

Now we think that it will be at 8% to 10%, of course, that’s an assumption. And the positive, however, can come from the Philippines, because when I say 2% to 3% that assumes that no cigarettes return to the legal market in the Philippine.

Now, hopefully, given the development in the Philippines, we’ll see some more volume coming back to the legal market and that can change clearly the overall equation. So we may end up in the middle of that range I gave, but that’s the best I can do at this stage..

Okay. That’s fair enough..

Okay. Now, the overall economic outlook, we all know the fundamentals, okay. Oil prices will be lower, so that’s helps economy and consumer spending. But in some places we’re going to see inflation following devaluation.

Not in many, because as we all know, its only one currency appreciating and all the others depreciating and remaining in relative parity to each other, so they -- when they trade with each other, we don’t have imported inflation. So Russia is the one that comes to mind first as we discuss previously.

Overall, I don’t see an acceleration, I think, overall of down trading at all on a global basis. I think we said, we stay on the same trends as we were in 2014, although slightly better, okay. We know the specifics of Australia. We discussed it and so on. Obviously, there is a bit of geographic mix.

But if we look at total market declines in 2014, there is no substantial difference between OECD and non-OCED especially, thanks to the recovery of the European Union. I mean, OECD decline roughly three point something percent and non-OECD 2.5% in 2015. So, I would say overall nothing worrisome at this stage..

Okay. That’s helpful. If I could just ask one question, just for me to understand, just some perspective on the lack of share repurchase obviously, supporting the dividends and that’s very important to you.

I want to understand like throughout 2015, would you add this sort of this -- sort of at the margin you’re close to a debt level that would push your rating down? Is there any consideration where you would allow for the debt rating to go down? I’m just thinking about acquisitions for example.

So maybe not so much for share repurchase but from an acquisition standpoint, would you or the Board consider the debt rating -- and violating the debt rating if you will?.

We always said and I maintain this. We will not lose our rating for share repurchase purposes. Now, if we have a strategic reason, that is a strategic acquisition or something then of course that can be considered. Okay. Absent that, we will do everything we can to maintain our A rating. Okay.

And I think we have to be prudent on how we manage the situation given the currency volatility we are in. Having said that, I want to stress that we are committed to share repurchases. We’ll see how the situation unfolds. And as soon as we can resume them, we will. We’ll not change our approach to that.

It is just a temporary situation that calls for caution given what happened with the currency. Okay..

Sure. Well, that’s good perspective. Thank you for your time..

Thank you..

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

Good afternoon. So just -- I guess two things that we’ve touched on already.

If it came down to it and you had to decide between the dividend and the debt rating, how do those fall relative to each other in terms of priority?.

I think I tried to clarify this. First of all, it’s rather a speculative situation and I said that I don’t see scenarios under which we will reduce our dividends, unless we have third World War..

Okay. That’s helpful. So the dividend would come before -- if you had to choose between the two, the debt rating might suffer before the dividend certainly. That’s fair..

Yeah. But if you do the mathematics, that’s a consequential effect. So, yeah. .

Okay, André. Thank you.

And then just looking at the EU, your guidance for the operating income growth there, does that include the savings from the Netherlands’ plant and how much -- can you quantify how much that is?.

Well, that’s all baked. Yes, it includes obviously the savings from the footprint optimization and that’s included in the overall guidance and in the cost indications I gave..

So, how much does that add from just the plant closure?.

A variety of reasons, I cannot disclose that number. I’m sorry..

Okay. No problem. And then just looking at Indonesia, certainly, the inflation from the fuel subsidy cuts late in the quarter had an impact on the category volumes there. But with oil prices pulling back, that’s reversed now.

Can you give any sense of what -- even though it’s early in this year, have you seen the improvement in January or what does it look like so far as start to the year?.

It’s very early to judge the effect. But that you said is correct. I mean, the subsidies were removed but oil prices are a bit low. We didn’t say anything in the market generally that shows any change in the dynamic in this direction but it is only one month. Okay..

So there is no other improvement yet but it’s just too early to really see..

Yeah. We didn’t see any effect in January. That’s all I can tell you..

Okay. Thank you very much..

Thank you..

Our next question comes from line of Vivien Azer of Cowen & Company..

Hi. Good afternoon.

In terms of your outlook for pricing for 2015 please, with it being broadly in line with historical levels, can you talk a little bit about the compensation of that pricing contribution because historically, it’s been fairly well balanced over year across your geographies but clearly in 2014 it was decidedly weighted towards EEMA and Latin America? Thank you..

Yes. In 2015, it is very balanced..

Okay. And then the second …..

So it is actual that’s why we project and now we know the specificities of 2014, we had Italy that skewed clearly the European Union. And we also had the Philippines absorption that skewed Asia and these are the two fundamentals. Okay, now..

Thank you. That’s very clear.

As a follow-up on the EPS growth outlook of 8% to 10% on -- impressive that you guys are maintaining that absent at the buyback, but as I think about the contribution then from not operating items of 200 basis point, clearly you get the residual benefit of $3.8 billion of share repurchases that you did this year but can you comment Jacek at all about your outlook either for tax or for interest expense?.

On the tax, we should stay broadly in that effective tax rate, which we had in 2014. So it looking 29, slightly below 29%. And on the interest expenses, you remember I hope that quite the portion of our debt portfolio you seen euros.

And so obviously, it’s put a bit of the lower pressure or reduces the pressure coming from the interest to serve our bond portfolio. So there is some benefit on us coming due to the overall lower interest rate, lower interest rate environment and also for the composition of our debt portfolio due to the significant portion of the euro debt..

That’s very helpful. Thank you very much..

Thank you..

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

Hi, Erik..

Hi. Good afternoon. Hello. One of the markets that we haven’t really talked about today was Turkey and there we’ve seen a volume is improved a bit.

So I was wondering if you can comment on the outlook for the Turkish market, is the down trading finished or does it look like it’s stable and does that then suggest that there is an opportunity for perhaps some profit growth and -- with the volume base remaining stable or have there been some regulatory moves there that suggest we may have another difficult year following a decent year in Turkey? Thank you..

Well, volumes in Turkey are stable. Illicit trade is stable. Okay. Increased a little bit, which outlines that the underlying volume is even better. I don’t see any change at this stage. I mean excise taxes are in. There was moderate increase in the specific and of the minimum tax.

So from a total market perspective, I don’t see any particular change in the trend. Now regarding the dynamics, clearly, there has been some down trading but shares have to -- seem to have stabilized now. And we did very well in the premium segment, particularly with parliament this type all the down trading.

So I think we are there for a decent year in Turkey going forward..

Thank you..

Our final question will come from the line of Owen Bennett of Nomura..

Good afternoon, guys. And just a couple of questions. Firstly, I was just hoping you could give an update on the rollout of Marlboro 2.0 in terms of how is it performing with regards to retaining current Marlboro smokers and also I guess crucially is attracting competitive smokers.

And also how many more markets are expected in 2015? And secondly, just coming back to Russia pricing, and we understand that you may have gotten a pricing benefit in 2014 from your stake in Megapolis? And could you confirm whether this is correct, and if so, is there likely to be some giveback from this benefit in 2015? Thanks very much..

The rollout of Marlboro..

Okay. On Marlboro, I think we are very pleased with our rollout. We have 100% retention of existing smokers, which is I think remarkable. And we do see change both in profiles and other all attraction from competitive smokers and the share performance of the brand in the markets where we have rolled out is a clear testimony to the success of 2.0.

And we will continue rolling it out. The plan is to be fully down with all the rollouts by early 2016, okay. We are ready in 26 markets and growing by the day. So which is through the planning and we are very happy with it. Now Megapolis is not in the pricing but an item that is below the OCI line, okay. I’m sorry, I’m asking the people that are more..

Okay..

Its income unconsolidated that’s where it is, okay..

Okay..

We have received clearly a dividend, so yes it will be somehow affected by the ruble, et cetera temporarily, but that’s currency clearly..

Okay. Thanks..

Thanks Owen..

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

That concludes our call for today. Thank you all for joining us. If you have any follow-up question, you can contact the Investor Relations team. We’re currently here in New York. And our next presentation will be at the Consumer Analyst Group of New York or CAGNY Conference on Wednesday, February 18th. Thank you, again, and have a nice day..

Thank you. This concludes today's conference call. You may now disconnect. And have a wonderful day..