Tobacco Documents Online

~moruiis FIVE YEAR PLAN 1988-1992 co nfi d enti al IN= ra a ~ V ti4 -C+ LI N

I I I I I I I 4 CONFIDENTIAL ~ U.S.A. ~ I I I I I I 1988-1992 FIVE YEAR PLAN BUSINESS PLANNING & ANALYSIS MARCH 1988 NOTE I I I Discussion and analysis of competitors is based on public information and internal modeling of competition developed by the Planning Departrnent. Projections and discussions of future actions by competitors are primarily based on extension of historical trends within the context of PM-USA's forecasted U.S. cigarette industry environment.

EXECUTIVE SUMMARY 2a437743:3 (

I I I I I I I I I I I I I I I I I I PLAN OVERVIEW Philip Norris U.S.A.'s 1988-1992 Five Year Plan sets forth the business strategies which will be employed to accelerate our morcentun in the cigarette industry. To respond to the current and expected industry/competitive environrnent, PM-USA has sociopolitical, marketing and operations strategies which have as an objective continued unit volume, market share and profit growth. While the cigarette industry as a whole continues to be impacted by anti-tobacco forces, PM-USA possesses strong internal assets -- a young smoker base, a leading position in most industry segments, superior product quality, modern infrastructure and substantial financial resources - to prosper despite this threat. These assets enable PM-USA to exploit emerging industry trends and position the company to achieve its volume and profit objectives unless the industry is significantly changed by external events such as large excise tax increases, a radical acceleration in smoking restrictions or unfavorable product liability rulings. Our Five Year Plan objectives include: • Domestic volume growth of 17.9 billion units. • Market share growth of 9.4 sharepoints. • Operating income increases averaging 13.4 percent per year. • Cumulative after-tax cash flow of $11.6 billion. As seen on the next page, PM-USA's five year objectives exceed those in last year's Plan and reflect our basic strategy for the future -- to enhance our current niomentum by aggressively investing in the cigarette business while maintaining our profitability and cash flow. To achieve these objectives, we have in place sociopolitical, marketing and operations strategies to: • Maximize industry volume potential by protecting the rights of smokers and manufacturers. • Enhance the strong brand imagery of our products through increased media support while taking advantage of brand development opportunities with targeted consumer programs and line extensions. At the same time we will actively work to increase our penetration of the price/value category. • Improve PM-USA's retail presence, particularly in the supermarket and convenience trade classes. • Pursue technological innovation both in terms of developing new products and refining manufacturing processes. • Meet growing production requirements within existing facilities while maintaining manufacturing flexibility, continuing to improve our superior product quality and ensuring a stable supply of quality leaf tobacco. A-1

CCVJPARIS0N OF PLAN ASSUMPTIGNS ADID PM-USA OBJDCI'IVES Industry ustry 1988-1992 1987-1991 Five Year Plan Five Year Plan • Avg. Annual Industry Voltmie Decline -2.8% -1.7% • Federal E~ccise Tax Per Thousand $8.00 $8.00 • Price/Value Category Share 21.9% (1992) 13.8% (1991) in Last Year of Plan PM-USA • Total Market Share Growth 9.4 share points 4.5 sharepoints • Total Volume Growth (Billions) 17.4(1) 6.3 • PM-USA Price/Value Penetration 35% (1992) 19% (1991) --.~ • Total Full Margin Price Increases $20.50 per 1000 $13.05 per 1000 • Annual Operating Incame- Growth 13.4$(1) 12.0% • Total After Tax Cash Flow $11.6(1) $10.0 fran Operations (Billions) (1) Post-Spinoff. Pre-Spiroff volume growth ='17.9 billion, operating incane growth = 13.4%, after-tax cash flow = $11.8 billion. ATTAIrtM= OF PROFITABILITY OBJECTIVES An outgrowth of our business strategies will be a significant expansion of PM-USA's market share along with increases in profitability and cash flow. To achieve these objectives, PM-USA must balance four components - pricing, volume growth, marketing spending and productivity improvements. Meeting our objectives is vitally important given shareholder expectations and the impact PM-USA has on Philip Morris Companies' results. Pricing The pricing actions of other manufacturers led to an acceleration of PM-USA's price increases in 1987 beyond the levels forecasted in last year's Plan. The December increase of $2.00 per thousand on top of the $1.50 increase in June represents a significant departure from the $1.00-1.25 level of semi-annual increases the industry had instituted beginning in June 1984. This acceleration is partially the result of competitive attenpts to maintain profit growth in the face of declining unit volune and a growing proportion of price/value products in their sales mix. Manufacturer pricing appears to have reached a new level which is expected to remain essentially stable during the Plan. However, this pricing is considerably higher than in last year's Plan and creates a number of industry risks. • Full margin retail prices are forecasted to increase 8.8 percent annually during the Plan. This compares to expected yearly growth in the consumer price index and disposable income per capita of 4.4 percent and 5 2 percent over the sane period Against this broader ~ . . ~ economic background and in conjunction with growing pressure from ~ , • ~ anti-smoking forces, excessive price increases may reinforce . ~ smokers' societal/perceived health concerns and provide an economic justification to reduce or stop consumption of cigarettes, or switch to lower priced alternatives. ~ w c.n I I I I I I I I I I I I I I I I I I

UK CIGARETTE SALES 1 975--1 981 140 1975 1976 1977 1978 a 1979 1980 1981 9u~arLLErbt~~

REAL RETAIL PRICE INCREASE OF UK CIGARETTES 1976-1981 1975 a 1976 1977 1978 1979 198s 1981 L,?.£tLc:CVo,:.

CHANGE IN U1K SMOKING AGE POPULATION 1976-1981 P ~ ta . 8 E R C E N •6 T C H A .4 N G E 0.2 1975 .a 1976 1977 1978 1979 1980 1981 Q S.. eM LLE W V 6r

IMPLIED PRICE E~'LA.STICITY OF UK CIGARE`ITE SALES 1975 1981 % Change Cigarette Sales (Billions) 131.1 108.3 (17.4%) Cigarette Retail Price 32.6 P 90.4 P 177.3% PDI/Capita L 431.9 L 980.5 127.0 P.eal Increase 50.3% Implied Elasticity - .2021 1975 Cigarette Sales (Billions) 131.1 Cigarette Retail Price 32.6 P PDI/Capita Real Increase Implied Elasticity L 431.9 1980 Cigarette Sales (Billions) 120.8 Cigarette Retail Price 71.3 P PDI/Capita Real Increase Implied Elasticity L 910.0 1977 % Change 124.0 (5.4%) 48.4 P 48.5% L 556.1 28.8 19.7% - .1431 1981 % Change 108.3 (10.4%) 90.4 P 26.8% L 980.5 7.8 19.0% - .4621 T m Note 1: (Change in Q) /(Q, + Q,,) r.~ (Change in P) / (Pl + P2) ~ GI •,j 14 3•J ~

ASSUMPTIONS 1975 1976 1977 1978 1979 1980 1981 Cigarette Sales1 131.1 131.7 124.0 124.4 123.3 120.8 108.3 Cigarette P2rices (Pence) 32.6 41.7 48.4 55.3 62.0 71.3 90.4 Personal ~isposable Income (Millions of Pounds) 18,501 21,237 24,075 28,351 34,201 40,205 43,623 PopulatiVn Age 15 + (000) 42,832 43,050 43,296 43,594 43,897 44,182 44,491 PDI/Capita Age 15+ (in Pounds) 431.9 493.3 556.1 650.3 779.1 910.0 980.5 Note 1: From Philip Morris International (See rnemo fran J. M. Levrat to F. Caton) Note 2: Weighted Average price based on sales and pricing data in memo above. The pricing data furnished by PMI does not reflect price discounting by retail outlets. Note 3: From UK Central Statistical Office per Chase Econometric's Data Base Note 4: Froin UK Central Statistical Office per Chase Econoretric's Data Base (Population for 1981 is estimated.) I