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lY~'L~A ~ ESTABLISMED 1760 ANNUAL REPORT 1946

ESTABLISHED 1760 Annual Report -1946

ANNUAL REPORT FOR THE YEAR ENDING DECEMBER 31, 1946 V.a.O AMERICA'S OLDEST TOBACCO MERCHANTS OFFICERS 0 ESTABLISHED 1760 HERBERT A. KENT - - - - - - - - - - - - - - - - President GEORGE D. WHITEFIELD - - - - - - - - - Executive Vice President EDGAR S. BOWLING - - - - - - - - - - - - - - Vice President TODD WOOL - - - - - - - - - - - Vice President and Secretary WILLIAM J. HALLEY - - - - - - - - - Vice President and Treasurer FRANK HOPEWELL - - - - - - - - - - - - - - Vice President DIRECTORS CLAUDE W. BERKLEY EDGAR S. BOWLING JAMES A. GLASCOCK LEWIS GRUBER WILLIAM J. HALLEY DONALD A. HENDERSON GEORGE D. FRANK HOPEWELL HERBERT A. KENT IRVIN H. PEAK F. GLADDEN SEARLE HAROLD F. TEMPLE TODD WOOL WHITEFIELD GENERAL COUNSEL-PERKINS, DA\`IELS & PERKINS TRANSFER AGENT-THE NEW YORK TRUST CO., NEW YORK, N. Y. REGISTRAR-THE NATIONAL CITY BANK, NEW YORK, N. Y. Executive Office-119 West 40th Street, New York 18, N. Y. Corporate O[Iice-15 Exchange Place, Jersey City, N. J.

New York, N. Y. February 7, 1947. THE MANAGEMENT of your Company is pleased to submit to you this brief report of its activities and its progress during the year 1946. EARNINGS Earnings before taxes for 1946 were lower than in 1945. A number of factors were responsible for this, the principal ones being a decrease in profits due to the higher costs, an increase in advertising and selling expenses due to the keener competition for the available markets, and a substantial loss on returned surplus goods during the first quarter of the year. Reduced federal income taxes left the net earnings of the Company at about the same level as the previous year. Net earnings per share of common stock were $1.26 in 1946 as opposed to $1.27 in 1945. It is interesting to note that a substantial increase in profits for the last six months of the year largely wiped out the decrease in profits of the first six months. This encouraging change was caused for the most part by the two price increases on cigarettes. The second increase restored our profit margins to more nearly our pre-war normal than was true in any of the past few years and resulted in gratifying earn- ings during the last quarter of the year. [3]

During 1946 the Company continued its policy DIVIDENDS of paying four interim dividends of 25c each on its Common Stock. Earnings for the year did not justify a year-end extra dividend. We expect to continue this dividend policy during 1947. The cost of the tobaccos going into our INCREASED manufactured products is now, and has been TOBACCO COSTS for some time, the highest in history. It is more than double the cost of tobaccos just prior to the war. We do, however, anticipate that prices will be somewhat less in the future, although we do not expect much price relief during the year 1947. Future prices will in a large measure depend upon Government plans for supporting the prices of leaf tobacco. Chaotic conditions surrounding the in- SALES AND PRICES dust.ry's return to peacetime operation seriously affected progress in the earlier months of 1946. The many months of short supplies ending in late October, 1945, prompted dealers, wholesalers and, to some extent, consumers to hoard. True, all direct customers were on an allocation basis and apparently received an inadequate supply. Yet, the release of greater quanti- ties for domestic use revealed untapped cases of cigarettes with a war emergency paper innerlining. These were rendered unsalable as we returned to the use of foil. Trade mark protection required cleaning the market of all such stocks. Then cellophane returned and again [4] 89300729

DISTRIBUTION OF THE SALES DOLLAR REVENUE STAIaPS TOBACCO AND MANUFACTURING COSTS 46c 9%c 2ic. cigarettes so wrapped made existing supplies unsalable. Time and again it has been proved that consumers view packages not covered with cellophane as old and consistently refuse to accept them. A number of Government warehouses were found to contain excessive supplies which were eventually declared surplus, forcing us, again in the interest of progress, to accept for return large quantities of cigarettes, smoking and chewing tobaccos. OLD GOLD was strong enough to weather these disheartening experiences and to regain momentum, recover distribution and accelerate consumer demand. Taking into consideration these recon- version troubles, our 1946 volume of domestic cigarette sales com- [51 8s3ao'73o

pared favorably with similar sales for 1945. Profitable operation, however, depends not only upon volume of sales but also upon the relationship between cost and selling price. In April, 1946, the OPA granted the cigarette industry its first price increase since 1937. This partially compensated for increased cost. October brought another increase which has helped earnings considerably. During the cigarette shortage of 1945, smoking tobaccos did exceptionally well. However, with the return of cigarettes in plenti- ful supply the demand for smoking tobacco for rolling purposes practically disappeared. Consequently this branch of the industry suffered during the past year. Here, again, we ran into difficulty with the return to tin packaging. Large quantities in the wartime paper packages were returned, but fortunately much of this was in good condition and repackaged. Due to competitive conditions smoking tobacco, although badly in need of relief, has gone on without a price change. Loose leaf, or scrap, chewing tobacco has done very well in the readjustment period. It is a product that enjoys greater volume when industry is geared to fulltime production and fluctuates with general economic conditions affecting employment. Profitwise, the chewing tobacco position has somewhat improved. Cigars continue to present a production problem. MURIEL and others in the large cigar classification are well accepted and in great demand. Unquestionably, we could have sold many more had they been available. Similar conditions also affected little cigars. Price (61 89300731

increases of approximately 20 per cent during the year put cigars in a comfortable position. However, this structure is threatened by an inadequate labor supply and continuing increases in the cost of raw materials due to short crops of certain types of cigar tobaccos. SALES PROMOTION Our advertising and promotion pro- grams on the air and in print built around the sales message "Enjoy a Treat Instead of a Treatment" has been very productive. Radio has carried our appeal into many homes via the popular "Songs by Sinatra" and "Meet Me at Parky's" national network programs. Play-by-play broadcasts of the baseball games of the Brooklyn Dodgers, Chicago Cubs, Chicago White Sox and Washington Senators provide the opportunity of talking to many thousands of smokers daily over a period of twenty-six weeks. The professional football games of the New York Giants gain for us a Sunday afternoon audience covering the market area of Greater New York. Spot announcements in several sections of the country were employed to maintain the consistency and the broad coverage of our consumer approach. ADDITIONS TO The remodeling and enlarging of our PLANT CAPACITY plant facilities at Louisville, Kentucky, for the production of cigarettes, which we mentioned in our letter of last year, is now being completed and we expect shortly to be in full production. These additional facilities plus several new highspeed machines, which we have been [7]

able to acquire, will enable us to increase our cigarette output and also give us the advantage of having two plants for the manufacture of cigarettes. This year we completed a modern redrying plant for the processing of leaf tobacco at Lexington, Kentucky. This new plant is now in operation and will greatly facilitate our leaf handling and somewhat reduce our cost. Modern redrying plant for the processing of leaf td [g] 89300'733

s Like most other comlitnies, EMPLOYEE AND during 1946 we have expe- MANAGEMENT RELATIONS rienced shortages of labor, absenteeism and a high rate of turnover. These conditions are still prevalent, in greater degree at some of our plants than at others. Despite this, however, our relations with our employees and with the ~ ~ co in Lexington, Kentucky. Completed in 1946. [9] 89300734