Philip Morris International (PMI)

Philip Morris International (PMI) Philip Morris International Inc. (PMI) became a separate legal entity from Altria in March 2008. PMI is a Virginia corporation with headquarters in New York. PMI only sells its cigarettes outside U.S. borders in about 160 countries. PMI was separated from Altria, in part, to protect the company from U.S. based regulation and litigation 1 and to maintain its global leadership by funding new market entries through joint ventures and acquisitions. 2 Although PMI and Altria are now legally separate companies, PMI s top executives have not changed and seven of the nine members of PMI s Board of Directors served on the Altria Board. PMI s Profitability PMI reported an increase in net revenues of 12.7% to $25.7 billion USD in 2008 and expects to return more than $ 9 billion USD in cash to its shareholders in 2009. 3 PMI reported increases in 2008 net revenues from 2007 of 21.8% in its Eastern Europe, Middle East and Africa region, 10.1% in Asia (includes Australia and New Zealand), and 23% in its Latin America and Canada region. Net revenues in the European Union were only up 12.8%. 4 From 2007 to 2008, PMI s Operating Companies Income (OCI) from the European Union region decreased to 46.2% from 47.1%, while its OCI from the Eastern Europe, Middle East and Africa (EEMA) region increased to 30.4% from 27.3%, making the EEMA region the fastest growing in terms of profits. 5 PMI has achieved double-digit profitability growth in the key markets of Egypt, Indonesia, Korea, Romania, Russia, Turkey and Ukraine. 6 In 2007, according to JP Morgan, approximately 64% of PMI s cigarette volumes and 43% of its profits were from emerging markets. Of the top 10 markets that contribute the most to PMI's profits, 4 are emerging markets (Indonesia, Russia, Turkey and Mexico). 7 PMI s Market Share According to PMI s 2008 annual report its first report as a separate entity - it is now the world s largest and most profitable publicly traded tobacco company; holding an estimated 15.6% share of the total international cigarette market outside of the U.S. 8 PMI owns 7 of the top 15 cigarette brands in the world and spent approximately $ 7 billion USD marketing its brands in 2008. According to Euromonitor International, in 2007, PMI had a market share of over 50% in 15 markets, up from 10 markets in 2002, and a market share of over 30% in 35 markets; 24 of these 35 markets were emerging markets illustrating the company's strong position there. 9 In November 2008, PMI reported that it was focused on growing market share in China, Bangladesh, India, Indonesia, Russia, and Vietnam. 10 April 2009 1

Country PMI s Top 10 Markets, 2007 Volume (billion sticks) % of country s market share Russia 101 26% Japan 63 24% Italy 49 53% Indonesia 47 29% Turkey 43 40% Ukraine 39 33% Germany 33 36% Pakistan 29 38% Argentina 28 69% Spain 27 30% Source: Euromonitor International. PMI s Increase in Cigarette Volume in Key Emerging Markets International brand shares are increasing in numerous markets, for example, PMI s international brands (Marlboro, Merit, Parliament and Virginia Slims) account for 75% of its 2008 shipment volume. This means that PMI is well positioned to continue to benefit from this trend. 11 International brands increase a tobacco companies sales volume globally by promoting such brands to younger smokers. As one tobacco industry strategist reported, it is important for international brands to win high penetration among young adult smokers, as success in this segment confirms a brand s image as younger and ensures longer-term usage of the brand by those consumers. 12 International brands also increase the value of the brand to a tobacco company because they can be sold at a higher price point. Russia: As a senior PMI executive in Russia told investors in 2008, Driven by rising incomes, the most important trend in the Russian market today is the tendency of adult smokers to switch to higher priced and especially international brand cigarettes... we have had great success with exciting racing promotions based on our agreement with Ferrari and the Marlboro MxTronica clubbing experience. Also, PMI promoted its Virginia Slims Uno brand in under-exploited venues, such as beauty parlors and nail salons and its Marlboro Filter Plus product in a pack resembling a cellular telephone. 13 April 2009 2

Philippines: In order to compete with local manufacturers, PMI targets Filipinos with cheap cigarettes in sachet-like packs with 5 and 10 sticks to make its premium brands more affordable. 14 Mexico: In Mexico, premium brands such as Marlboro made up 65.4% of the market in 2008, in part, due to consumers moving up to premium brands. 15 Cigarette volume increased in all regions except the EU from 2007 to 2008: up 4.4% in its Eastern Europe, Middle East and Africa region, up 5.8% in Asia, up 11% in Latin America, down 5.5% in European Union. Cigarette Volume % change from 2008 2007 (million sticks) 2007 to 2008 European Union -5.5% 243451 257541 Eastern Europe, Middle +4.4% 303205 290310 East and Africa Asia +5.8% 223724 211480 Latin America and Canada +11.0% 99377 89307 Total cigarette volume +2.3% 869757 848638 Source: Philip Morris International Inc. Form 10K Filed February 26, 2009 with the U.S. Securities and Exchange Commission. Selected country-specific examples of growth in volume in 2008 (source: PMI s 2008 Annual Report: Russia, up 7.9% Turkey, up 4.9% Ukraine, up 6.6% Indonesia, up 9.7% Mexico, up 22.6% PMI, now free from regulatory constraints in the U.S., is aggressively re-inventing its global Marlboro Brand in emerging markets. PMI s global brand Marlboro is the world s top selling international cigarette brand accounting for about 36% of the company s total 2008 shipment volume. In February 2009, PMI s Chief Financial Officer predicted that the re-invigorated Marlboro will enable us to compete very effectively across both mature and emerging markets. 16 As JP Morgan noted in 2007, We now see a new willingness at PMI to innovate in their iconic brands, a willingness that we view as absolutely critical for the success of a company oriented toward premium products. 17 PMI launched high tar and nicotine products in Indonesia PMI introduced a new brand in 2007 - Marlboro Mix 9 a variant of a kretek cigarette sold in Indonesia that delivers higher nicotine and tar than a regular Marlboro. An estimated 92% of April 2009 3

smokers in Indonesia use kreteks. 18 This new Marlboro is intended to acquaint consumers with the global Marlboro brand and introduce them to traditional Marlboro cigarettes. 19 Another PMI-owned kretek sold in Indonesia Dji Sam Soe contains tar levels as high as 39 mg per cigarette and delivers 2.3 mg of nicotine (compared to the usual range of 10-12 mg for high tar cigarettes sold in the U.S.). 20 PMI introduced quick-nicotine-fix products in nine markets In 2008, PMI test-marketed in Turkey its Marlboro Intense a mini cigarette engineered to deliver the same amount of nicotine of a regular length Marlboro, but substantially shorter for a quicker smoke. PMI launched the Marlboro Intense in nine markets in 2008. 21 The company envisions worldwide demand for the quick-nicotine-fix product based on anticipated increases in smoke-free environments causing people to shorten their smoke breaks. 22 PMI recycled the fraudulent marketing of low-tar products from the U.S. to at least 20 markets throughout the world. PMI is increasing its market share in several markets including four Eastern European countries (Kazakhstan, Romania, Russia and Ukraine), Brazil, Japan, Korea, and Kuwait by introducing Marlboro Filter Plus also called Marlboro Flavor Plus in some markets. The package of this brand resembles a mobile phone and is marketed as having a unique, multi-chamber filter allegedly delivering lower tar levels and a smooth taste. 23 PMI s own consumer research has shown that between 40% and 60% of Marlboro Filter Plus smokers are young adult smokers 24 In Russia, Marlboro Filter Plus is adding volume and helping to keep Marlboro s image modern and relevant, according to PMI s managing director in Russia. 25 In Egypt, where the use of light and low brand descriptors was banned in 2007, PMI licenses the production of Merit Yellows (low-tar cigarettes) to the state owned Eastern Tobacco Company. Products are color coded by tar level so consumers are able to recognize them. In 2006, a U.S. Court found that PMI and other the tobacco companies knew for decades that there were no health benefits from smoking low-tar cigarettes, yet falsely marketed such products to sustain profits. Euromonitor International forecasts that during the 2006-2011 period global cigarette sales in the ultra low-tar segment (less than 4 mg tar) will increase by 16.5% and by 10.1% in the low-tar segment (4-6 mg tar), while the high-tar cigarette segment (10+ mg tar) is expected to increase by only 3.3%. 26 PMI is aggressively targeting women throughout the world PMI has introduced slim and superslim cigarettes through its Marlboro Gold Eagle, Virginia Slims Uno, and Muratti Gold Slims in Eastern Europe, Japan and Greece. PMI has also April 2009 4

introduced Indonesia s women to the first superslims kretek called A Volution, which is 27, 28 packaged in a lip stick tube look-alike. PMI is targeting young males PMI is expanding its menthol segment with Marlboro Crisp, Marlboro Fresh, and Marlboro Ice Mint in several markets. In 2008, PMI launched Marlboro Black Menthol - a masculine, stylish, and premium black packaging in Japan. 29 In Mexico, in May 2008, PMI introduced a Delicados, menthol line, and Benson & Hedges remained the leading brand in the menthol segment. 30 PMI engages in a wide range of community investment initiatives while simultaneously causing the disease, disability and ultimately death of its customers. PMI reported engaging in so-called corporate social responsibility philanthropy efforts in about 50 countries in 2008, ranging from donations to a medical center in Colombia to treating disabled elderly in their homes in Georgia. A $5 million USD donation was also made to a university project under Putera Sampoerna Foundation in Indonesia. 31 Total 2008 corporate contributions disclosed on PMI s website was around $22 million USD (a mere fraction of PMI 2008 net revenues of $25.7 billion USD). Recognizing that there is a fundamental and irreconcilable conflict between the interests of the tobacco industry and public health, governments have been encouraged to act to regulate purported socially responsible activities such as those carried out by PMI. 32 Community investments to selected countries in 2008 (USD) Indonesia $5, 096438 Philippines $1,457,616 Russia $572,647 Ukraine $477,164 Mexico $377,309 Turkey $61,383 Source: Philip Morris International. Charitable contributions. 2008. Available from: http://www.philipmorrisinternational.com/global/downloads/ci/list%20of%20charitable%20contributions%20 2008.pdf. 1 Blackwell J. Philip Morris International stands alone. Richmond Times-Dispatch, 2008 Mar 29. 2 Philip Morris International Inc. Form 10-K. Filed February 26, 2009 with the U.S. Securities and Exchange 3 Remarks by Hermann Waldemer, CFO PMI to Consumer analyst group of New York conference. Feb 17, 2009. http://library.corporate-ir.net/library/14/146/146476/items/324776/33115bf0-21e6-449e-8986-914ab234c783_pmi-2009-02-17-cagny-distribution-final.pdf and http://library.corporate- ir.net/library/14/146/146476/items/324774/f20e1ab4-77d9-4f44-82e1-3b772bac5e7a_pmi-2009-02- 17CAGNY%5BDISTRIBUTIONFINAL%5D.pdf. 4 Philip Morris International Inc. Form 10-K. Filed on February 26, 2009 with the U.S. Securities and Exchange 5 Philip Morris International Inc. Form 10-K. Filed on February 26, 2009 with the U.S. Securities and Exchange 6 Remarks by Hermann Waldemer, CFO PMI to Consumer analyst group of New York conference. Feb 17, 2009. April 2009 5

7 Dayton Matlick. An upbeat future. Tobacco Reporter Magazine (citing investors presentations at TABEXPO Paris 2007). January 2008. 8 Philip Morris International Inc. Form 10K Filed February 26, 2009 with the U.S. Securities and Exchange 9 Euromonitor International. Philip Morris International Inc. in Tobacco. March 2009. 10 PMI Presentation to Morgan Stanley. Nov 18, 2008. http://library.corporate- ir.net/library/14/146/146476/items/316158/final%2011-18- 08%20Morgan%20Stanley%20website%20distribution%20slides.pdf and http://library.corporate- ir.net/library/14/146/146476/items/316158/final%201118-800%20am%20ms%20distribution%20remarks.pdf. 11 Philip Morris International Inc. Form 10K Filed February 26, 2009 with the U.S. Securities and Exchange 12 Iqbal Lambat. Top Dogs. Tobacco Reporter. 2007. 13 McLoughlin L, Managing director PMI Affiliates. Credit Suisse International Global Consumer Products Trip in Moscow. Sept 30, 2008. Moscow, Russia. Available from: http://www.philipmorrisinternational.com/pmintl/pages/eng/press/speeches/remarks_20080930.asp. 14 Philip Morris sees smokers shift to cheaper cigarettes. abs-cbnnews.com. Oct 29, 2008 http://www.abscbnnews.com/business/10/29/08/philip-morris-sees-smokers%e2%80%99-shift-cheaper-cigarettes. 15 Philip Morris International Inc. Form 10K Filed February 26, 2009 with the U.S. Securities and Exchange 16 Remarks by Hermann Waldemer, CFO PMI to Consumer analyst group of New York conference. Feb 17, 2009. 17 Dayton Matlick. An upbeat future. Tobacco Reporter Magazine (citing investors presentations at TABEXPO Paris 2007). January 2008. 18 Brandy Brinson. A good match. Tobacco Reporter Magazine. Nov 2008. 19 Euromonitor International. In: Country Watch: Indonesia, 2009. 20 Don Hedley. Tobacco Journal International. New tax regime could change the market. March 10, 2009. 21 Remarks by Hermann Waldemer, CFO PMI to Consumer analyst group of New York conference. Feb 17, 2009. 22 Test marketing for 'mini cigarette': Philip Morris has launched a new "mini cigarette", called Marlboro Intense, that can be smoked faster, but has the same amount of nicotine as the full-size version. Tobacco Journal International. Feb 3, 2008. 23 Remarks by Hermann Waldemer, CFO PMI to Consumer analyst group of New York conference. Feb 17, 2009. 24 Remarks by Andre Calantzopoulos. Chief Operating Officer PMI Inc. JP Morgan Global Tobacco Conference London, June 27, 2008. http://library.corporate-ir.net/library/14/146/146476/items/298867/2008-06-26-ji- JPM%20Distribution%20FINAL.pdf. 25 Remarks by Leo McLoughlin, Managing Director PMI Affiliates. Credit Suisse Global Consumer Products Trip Ritz Carlton Hotel Moscow. Sept 30, 2008. http://library.corporate- ir.net/library/14/146/146476/items/309199/2008-09-29-dr- Russian%20Speech%20[FINAL%20DISTRIBUTION%20COPY].pdf. 26 Euromonitor International, (database online). London: Euromonitor; c2008 (updated 2008 June 5). Tobacco- World. Tar Still Lightening. 27 Philip Morris International (PMI). 2008 annual report. New York: PMI; 2009. Available from: http://investors.philipmorrisinternational.com/phoenix.zhtml?c=146476&p=irol-reportsannual. 28 Slims on rise. Tobacco International Journal. 07 Jul 2008. 29 Philip Morris International (PMI). 2008 annual report. New York: PMI; 2009. Available from: http://investors.philipmorrisinternational.com/phoenix.zhtml?c=146476&p=irol-reportsannual. 30 Remarks by Andre Calantzopoulos. Chief Operating Officer PMI Inc. JP Morgan Global Tobacco Conference London, June 27, 2008. http://library.corporate-ir.net/library/14/146/146476/items/298867/2008-06-26-ji- JPM%20Distribution%20FINAL.pdf. 31 Philip Morris International website. Community Investments http://www.philipmorrisinternational.com/global/downloads/ci/list%20of%20charitable%20contributions%202008.pdf 32 FCTC Article 5.3 and FCTC Article 5.3 Guidelines, para. 20; Rec. 6.1-6.4. April 2009 6