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L INTERt`1AL PLANNING MEE"TING April 8-9 Five Year Plan Issues Key issues which could impact PM-USA's ability to met our short and long-term profit objectives: 1) Industry demand 2) Competitive actions 3) New product trends 4) Operations constraints 5) Management development 1. Industry Demand - Financial - consumer reaction to rising retail price of cigarettes o Real cost of smoking decreased in the inflationary 70's and early 80's. 23.3% increase in retail price in '83 in concert with 3% CPI increase reverses the trend. chc.ti-r- Q-*4~A us cP2 / 8 3-67 9,Za/op.a. o National average price per pack $.93; $1.00 in several states. o International markets have experienced volume reductions when retail rise has been rapid (UK, Germany, Australia). v~ i nw~eS cs~ usw~. - Relative cost of cigarettes U.S. - Real increases have been occuring frequently Priee wcr.ea.-Qes vs inf o Increase factors - FET - further rises? L0.st 9-yBaV~s 4- - State/Local - much activity expected; plan contains 0O annual increase; could be more. `zz - Manufacturers - important price contribution to profit.' &' 3 o cost inflation will be less o % increase less due to higher base cost o will others follow or hold to build volume - Non-Financial o Anti-smokina - Non-smokers - Social cost - Youth o Restrictive legislation ,rf - Smoking in public places/work places (ban segregation). - Marketing activities - sampling, advertising, pronotion.

0 Health issues - Government efforts - Lawsuits - liability o Social acceptability/lifestyle o Industry response - TI, TAP, TAN, PAC's - Political base for response - tobacco states narrowing, how to handle non-tobacco majority. 2. Competitive Actions - Current industry situation o Low growth - softness so far yet projected to shcw some growth after ' 83 . , ~ g 3 -g~ 5y"O" ~~ Pc - Smoker demographics: Less new6 &okers,i le/female mix, socio-economic/ethnic mix. neede!&~~ga-'"5 'S (,V L"c.u.~~4 ~ S e/.OK7lr o Share losses for some competitors (after periods of growth); others continue to lose. C~ ~ r -1o~~y pea v-s o Excess capacity (plant and people) due to: - Share losses - Export softness - Capacity expansion programs Oue.vto-'.3 4-&(ooc,_T~ o Capacity situation is further exacerbated by expansion by USA and RJR plans.-- 3-7% ob~. o Margins are among highest in the world. - Importance of U.S. cigarettes to corporate parents (weakness of non-tobacco businesses). - Steady increase in margins over past decade. - Less pressure from cost inflation. -i ~ _ g 2, -g ~ ~C---> r 7, IF - Competitve options c'~S+_ Pf'`N 6. o Generic/private label - gap has widened as Liggett hold back ( $1.50 carton) . C~~~~3 5~„ 52.o~fo - Differential (-o-- wise) is above l0d-brands. - Build volume opportunistically, preclude others from entering market due to low margins. i~ .-,14.

o Hold/cut branded prices o Quantity in pack o Couponing - cbnsuh.e~- acA~cvj vocbwj 0 2for1 o Consumer incentives o Increased marketing - N L-E-5 e+qp ~gz o New products - Line extension limitations - New product feature o ingrediant removal o filtration (a' la Barclay) o third party endorsement - Roll your avn.? 3. New Products (PM) / K-eL., I;r Current situation --VVILs5e-a i9$z -+-ge.r- 3.(. )a, I a ~18~3 I, ~ b o Most new product growth from line extensions (still have some options). 7-,A, ,,~~ Pm -,s o Tar level segmentation stabilizing P.Q, - Compete intra secrment b--~ S ,?-- o PM volume growth required significant new product volume - New brands o -1-a-f c~ v-fl ~~ v o-w~. 3 g S`~/So o Few successes Tg-.~~ ~ p`^- N ~S. o Product must have significant point of difference o Differentiation beyond traditional segments - Packaging - ItIA - ac ~c. , P l &.L - Taste - 9 - Other product features Expensive - product and intro-marketing - Reduced margins ~ 6 4DuL- ra - Reallocation of limited marketing resources ca o exposure of volume from current brands ~ ~ ~ 133 w,~, ~, P~ ~~rs v --k-d' q v Gdlu e t a V~- 0,6 ~ . ~ .~ c,~

o Offensive and defensive introductons - risk of cannibalization c ka..,-t p . ~ ~ o Competitive response - ability and speed 4. Operations - Less capacity, less capital ('7y4 o Cabarrus/20th Street 0 3rd line RL o People imbalance - cost - Cost contairunent V~ V__ V_I!i, o Less inflation - constant $ o Margin pressures - New products - Increased quality - Flexibility o Capacity o Product mix o Product changes - External pressures o Self-extinguishing cigarette o Cigarette additives - Biological reactions - Removal o Label rotation - manageable o Leaf price support system closer to actual $ 5. Management Development - Dti.nima.l expansion - improved productivity/professionalism

- Succession o Cross training (lateral) o EEOC o Key jobs - Maintain morale - Stay personal