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SOUZA CRUZ TSG - 8th SEPTEMBER 1993 SECRET COMPETITOR ANALYSIS - ~2nd.qUARTER 1993 1. TOTAL MARKET DOMESTIC CIGARETTE MARKET VOLUME - 2nd Qtr 1993 ~Bns) 28585.2 Total Market Souza Cruz 22773.2 Phi!ip Morris 4706.0 Nationals 1106.0 MARKE'I: sHARE' 2rid Qtr 1993 Total Market 100.0 Souza Cruz 79.7 16.5 Phi!ip Mords Nationals AVG. M~,RKET PRICES (US$) I " 3.8 0.85 1st Qtr 1993 Var % II (3.7) (6.0) 3.4 2ndQtr 1992 Var % I (6.9) (13.1) 25.1 24.2 36.6 1st Qtr 1993 2nd Qtr 199;2 lO .o lOO.O 81.7 85.4 15.3 12.3 3.0 0.81 2.3 0.72 1.1 - Volume I Mix I Market Share The market volume (DP) showed a 6.9% decline in 1993 2nd. Quarter when compared to the same period of the previous year. This performance was a result of the following facts and its consequences: - the higher average price levels practiced during 1993 2nd. Quarter, which reached US$ 0.85 in the quarter compared to US$ 0.72 in 1992 2nd. Quarter, an 18.1% real price increase. - the increase in cross border smuggling plus local DNP sales (tax evasion). When comparing 1993 2nd. Quarter with 1993 lsL Quarter, total market volume also declined by 3.7%. Price increases of 3.6% in the period coupled with higher cross-border smuggling levels were the main reasons behind the reduction in the DP market sales volume. Although sales volume remains weak, there are some signs of a lower rate of decline in relation to previous year's periods. Market sales mix in the quarter was 0.2% above that reached in the same quarter last year, due to the establishment of the new price category structure at the end of January'93, leading to an increase in the price of several of high-volume brands. C~ r'~ P~ --,,4 C~ BAT Industries document for Legal Services - Health Canada 30 May 2000

1.2 - Pricin,q Average cigarette prices were increased on a monthly basis during Aprir93 and May'93. In June'93 and July'93, prices were increased twice per month slightly above inflation rates, as a safety measure to defend the Industry against the possibility of a new price freeze in the short term, given the still unclear economic scenario and inflation rates topping the 30% per month level. 2. PHILIP MORRIS (PMM) 2.1 - Main activities in the Quarter PMM's market share showed a growth trend in the quarter, mainly due to the launch of Lark KS SC in a VFM price category: the competitor's S.O.M. reached 16.5% in 1993 2nd. Quarter compared to 15.3% in 1993 1st. Quarter. Sales were up by 3.4% in relation to the previous quarter, benefiting not only by Lark's launch but also by strong selling-in activities in general. After the launch of L&M Lights SC in February'93 and the launch of Lark KS SC in April'93, PMM's sales mix changed considerably, with a growing importance of these new brand families (representing currently more than 40% of sales volume), reducing in tum the relative importance of lower priced local brands (e.g. Palace, Mustang, California etc.). Given the growing share of Lark, PMM's mix declined 0.1% in relation to the previous quarter. S.O.M. Jan Feb Mar Apt May June July (199211993) 1993 1992 1993 1993 1993 1993 1993 L&M Li~thts faro. 4.3 3.8 4.8 4.3 4.2 4.0 3.8 Marlboro family 2.9 2.1 2.5 2.1 2,3 2.3 2.0 Palace family 3.0 2.1 2.2 2.0 2.2 1.9 1.6 Mustang family 1.6 1.4 1.4 1.6 1.7 1.6 1.3 Lark KS SC - - - 1.6 2.5 3.0 3.0 Other PMM 4.8 3.9 4.7 4.2 4.1 3.9 3.3 The following table shows two important changes in PMM's media spend in the last months: the concentration of investments in Lark, launched in Aprir93, and L&M Lights, with two important consequences. On the one hand, lower ATL investments in Marlboro, which is relying more on BTL spend and intemationa.I sponsorships. On the other hand, the elimination of investments in local brands, namety Palace I Mustang, in favor of international offers. o r,o ...,4 ...j j~ ...,4 BAT Industries document for Legal Services - Health Canada 30 May 2000

ATL SPEND (us$ ooo) 3rd. Qtr. 1992 4th. Qtr. 1992 1st. Qtr. 1993 2rid..Qtr 19,93 July 1993 L&M UGHTS FAM 340O 2010 1090 854 536 MARLBORO FAM 639 1483 791 295 LARK ,, , ill 4147 509 PALACE/ MUSTANG 585 920 2.2 - Philip Morris ; July ! Auqust 1993 DALLAS launch As a response to PMM's Lark launch at the end of April'93, Souza Cruz launched Pall Mall at the end of July'93 at price category B, in the more competitive Centre-South markets. The brand was launched in two versions, a full flavour aiming at attacking PMM's Lark, also positioned in price category B, and a mild, acting as an undercut to L&M Lights soft cup and other PMM mild local brands, positioned at price category C (Palace, Mistura Fina and Luxor). Initial tracking suggests that Pail Mall has st/ccessfully taken-out from PMM's brands. Following Pall Mall launch, PMM's market share dropped to 15% in July'93, the lowest level since February'93, with all competitor's brands showing a declining, or at best, stable performance when compared to previous months. As a result, at the end of August t993, PMM launched nationally a new brand, Dallas KS SC, also in full flavour and mild versions, both positioned in the low end of the market (category A), 20% cheaper than Pall Mall family and Lark. It is reported that the brand will receive media support. Souza Cruz anti-Dallas strategy is based on the launch of a superior offer in terms of quality / image in the same price category. Derby KS SC is being prepared to be rolled out nationally by mid-September 1993, also in full flavour ! mild versions. 3. Philip Morris - Production I Resources Reduction of headcount overall was 11,6% when comparing September 1992 with July 1993, as stated in the table below:. PO 0 PO ,...q CO BAT Industries document for Legal Services : Health Canada 30 May 2000

Headcount . Direct Employees Sept March July 1992 1993 1993 1468 1457 1151 1370 1263 1223 2838 2720 2374 98 100 96 191 198 200 280 279 256 1196 1162 1142 4603 4459 4068 Curitiba factory Sta Cruz do Sul factory Total Industrial Sta Cruz do Sul (leaf) Sta Cruz do Sul (pdnting facility) Head Office ISle Paulo) Sales I Distribution (south I southeast! TOTAL The functioning of the 10 MK9 5000s, brought in from PM-USA, probably • helped to bring down numbers in the industrial area, thereby promoting greater efficiency. 4. Philip Morris - Exports Export sales for the first six months of 1993, at US$ 48.8 million (estimated at 7.5 billion sticks), already representing 53% of the volume exported in the whole of 1992. It is observed a significant growth of PM exports to Paraguay, basically with the aim to increase its share of the DNP (export return) segment. This is a clear strategy PMM is adopting as a way to increase volume and share in the recessionary Brazilian market. Comparing total production emerges for 1993 first semester. against headcount, the following picture Volume Sales (Bns) 1992 YEAR DOMESTIC 18.7 EXPORTS 14.2 i ,i TOTAL 32.9 1993' Difference Jan/Jun (pro-rata) 9,3 (0,5%) 7.5 5,6% 16.8 2,1% HEADCOUNT (hr.) Sept July 1992 1993 I IIIII I DOMESTIC 4603 4068 Variation 1%) (11,6%) IVOLUMEPERHEAD I 1992 I AVERAGE PER MONTH 596,000 1993 I Var. (%PI 688,0O01 15,4% I P,J E:) ,.,.,j J:~ "".,4 J~ ,,.D BAT Industries document for Legal Services : Health Canada 30 May 2000

5. Philip Morris - Finance On the financial front, PMM achieved an important tax advantage fo=: the cigarettes produced in its Santa Cruz do Sul factory (Rio Grande do Sul State). The State's government conceded an increase in payment terms from the usual 17,5 days to 55 days for the value-added taxes of cigarettes (25% of the retail price). In Brazil, given the inflationary environment, an increase in sales tax payment terms is usually more financially advantageous than a lower tax bracket. PMM's agreement will generate more working capital, due to the improvement in the competitor's investment income on taxes. In order to take full advantage of this float income, PMM will possibly transfer all its domestic production to this factory, with the Curitiba factory remaining responsible only for exports. If this action takes place, it is estimated that PMM will be capable of extending its credit terms nationally a further 2,5 days, without changing its current financial position. Souza Cruz is acting basically towards two alternatives to offset the advantage obtained by PMM: • -> Obtain fiscal incentives to new Souza Cruz investments in the Rio Grande do Sul State, specially in the tobacco area. • .) Obtain the same incentive in another state, where Souza Cruz maintains cigarette operations. 6. DNP The appearance of cross-border trade into the Brazilian cigarette market was mainly caused by the increase in domestic cigarette prices, coupled with the higher tax levels prevailing in Brazil, when compared to neighboring countries. Souza Cruz is suffering competitive pressures in view of the segment's growth, concentrated basically on the following issues: -.> Philip Morris: As previously mentioned, as a part of its strategy, the competitor is increasing its share of the DNP segment with growing exports to Paraguay, clearly indicating the competitor's intention of intensifying the transit, at more competitive prices, of its exports. The main brands returning to Brazil are local, traditional milder brands, which have an historical good quality reputation in the market, such as Galaxy and Shelton Lights. -.) Counterfeits: The counterfeits of Souza Cruz brands, originated in Paraguay, are also increasing sales volume, concentrated mainly in Ritz. P,O C:) r~o P~ j:~ ..,.j U"l o BAT Industries document for Legal Services : Health Canada 30 May 2000

-> Nationals: Sudan is exp!oring the DNP segment, positioning its products in an ultra low price level (40% to 50% below the low end of the DP market) Souza Cruz actions are focused on the two main issues, i.e., PMM's sales volume growth and Ritz counterfeits. • In order to biock PMM's growing share of the segment, both Viceroy KS SC and Viceroy KS HL will be launched in the DNP segment to attack both Galaxy / Shelton Lts. • Ritz export volume, which was controlled by Souza Cruz as a way to stop the illegal reimports, will be reactivated, aiming at limiting counterfeit sales. 7. Philip. Morris Poss..ible Next Moves The recent actions of PMM demonstrated that the competitor is fully committed to its objective of market share growth of 2 percentile points p.a. and sales volume growth in Brazil. In order to achieve these objectives, PMM is prepared to literally "buy" market share, which can be demonstrated by the recent launch of Dallas in the lowest price category, which followed Lark's launch only three months age. Also, unprecedented high media investments and the growing presence of PMM's brands in the DNP market, confirm its determination gaining market share. Depending upon Dallas performance and the success of Souza Cruz strategy, PMM may follow another possible strategy to increase its market share: the full utilization of the DNP segment to launch international brands (L&M family and Lark). .,8. ,Nationals The two main national manufacturers have distinct short term growth strategies in the market. While Sudan is increasingly exploring the DNP border trade, Cibrasa's sales are heavily based on tax evasion practices, effected by the company itself (in the case of excise taxes) or by its distributors (in the case of value-added taxes). Souza Cruz developed an approach to reduce these companies' sales, based on the following actions: 1. A non-filter cigarette was launched in a restricted area in the north of Brazil, to test its effectiveness in blocking Nationals sales growth, by recovering the preference of some important wholesalers and distributors in the region. IXJ O ",4 j:== Lrl BAT Industries document for Legal Services • Health Canada 30 May 2000

2. Derby, despite aiming primarily at attacking PMM's Dallas, will be marketed nationally, with special emphasis also in Nationars strongholds, i.e. some areas of the North, Northeast and border regions. Meanwhile, Souza Cruz continues working together with the Brazilian tax authorities in order to furnish the information regarding the distributors / companies that are evading, demonstrating the size of the "hole" that these companies are causing both to federal ! state governments. 0 J~ U'l BAT Industries document for Legal Services • Health Canada 30 May 2000