Tobacco Documents Online

, Notes from Sea Island Planning Meeting April 1992 These notes are confidential. Its contents are highly sensitive and care should be taken to restrict its discussion to authorized persons.

SEA ISLAND MEETING ISSUES 1. Growth Issue Our stated IFO and EPS objectives are to grow at an annual rate of 10% above inflation. In the highly inflationary decade of the 80's, we grew EPS at a rate of 20% and IFO at a rate of 22.4% per annum. Our current plan continues to target EPS growth at 20% and IFO growth at 15% per annum. This is in line with external expectations, but, may not be realistic in light of the current low inflationary environment projected for the 90's and the growth prospects and highly competitive nature of the industries in which we participate. Therefore, we must evaluate the internal as well as external advantages and disadvantages of modifying our long-term growth objectives. Our international businesses are increasingly important in meeting our growth objectives. Therefore, we must pursue international opportunities aggressively. 2. Pricing Issue Loss of pricing flexibility is viewed as an issue that will continue to hamper our financial growth during the plan period. This is principally due to the low growth, low inflationary environment that is expected to persist during the 1990's and to the increased consumer focus on product price/value relationships. 3. Marketing Issue Our marketing efforts are being viewed as having lost some vitality, especially within an increasingly competitive environment. We are not being perceived as aggressive enough. There is an interest in increased accountability of our marketing spending. 4. Cash Flow Use Issue The optimal use/uses for the Company's significant excess cash flow must be determined. A larger share repurchase program and diversification are viewed as strategies to be explored in more depth. STRICTLY CONFIDENTIAL

5. Acquisition Issue In general, acquisitions continue to be viewed favorably as an effective way to utilize the company's excess cash flow, particularly for the international expansion of the beer business and the continued growth of the international tobacco business. However, strong emphasis was placed on the need to invest in developing and rationalizing the food business before making any further large-scale acquisitions. 6. Organizational Issue The organizational structure must be reviewed and modified in response to the company's current size and the worldwide scope of operations. Simplification of the organizational structure is essential to enhance communication, efficiently utilize resources, and effectively respond to a more complex and competitive business environment. Furthermore, building management depth is critical throughout the organization. 7. Distribution/Logistics Systems Issue Rationalization of distribution is viewed as an area of significant cost savings opportunities. 8. Corporate Image Issue Our efforts to build the company's corporate image as well as to develop and communicate the company's stand on issues of public significance must be as strong as our focus on sustaining the company's superior financial performance. 9. Other Issues The strategic fit of the food service business was questioned. Exploring the opportunity of expanding PMCC was suggested. STRICTLY CONFIDENTIAL

NOTES FROM SEA ISLAND MEETING Frio y. April24. 1992 PMUSA Question (E. Bailevl: Are we doing anything to make the Marlboro image more contemporary? n w We are supplementing the traditional image of Marlboro, which continues to be very attractive to entry-level smokers, with marketing efforts that revolve around more contemporary themes (i.e. race cars). It is a delicate task because that image is so strong and is still the preferred brand of entry-level smokers (about 60% market share). Question (R. Huntlev); What is the impact of Black & White and how do you evaluate the threat of private label cigarettes? n w r• Retail masters program is designed to tie in private label to the rest of our marketing efforts. Through that we hope to get a high share of Black & White and use it as a vehicle to accomplish the rest of our marketing objectives, which is to sell full price cigarettes. Question (R. Penske): How do we plan to hold on to Marlboro smokers as they get older? Answer: We have a significant share of smokers in every age category and they tend to be loyal to the brand. We do not have experience with entry-level smokers starting with discount brands and do not know what their behavior would be as they get older. Question (R. Penske): How much industry volume is shifting to club stores? Answer: 6-8% now; 15-20% by 1996. Question (R. Penske): Are these outlets asking for more promotional dollars? Answer: No. We represent a very small portion in these outlets' sales today. This is a new category for these outlets and they do not tend to be as aggressive with cigarettes as they are with food/household products. STRICTLY CONFIDENTIAL

Question (G. Weissman): Price increases in cigarettes and marketing costs (price promotions) keep increasing -- Could we consider constraining both prices and marketing? (Could this create possibilities to raise prices at the lower end of the price market?). n w r• PMUSA has another model which looks at constraining prices for premium brands. This is being considered and is something we would look at more next year. (There was some discussion ensuing and a number of directors, including Joe Cuilman and George Weissman, seemed to be observing that it might be the right time now to consider holding the price at the premium end of the market.) Question (P. Douglas): Is new technology that we are developing to improve taste and quality applicable to the low-price category? How much difference is there in quality between premium and discount brands? n w r• Not different enough. However, by way of trend discount cigarettes are now becoming more different in terms of materials used and presentation (wood pulp paper vs. flax, blend composition, packaging, etc.). Question (P. Douglas): Are we getting sufficient impact from our lobbying efforts? Is support from tobacco farmers helping us? Answer: Tobacco Institute doesn't help us very much and we need to reconfigure our constituents. Question (H. Maxwell); Do we feel in the 5-Year Plan that we will lose our ability to advertise in PMUSA? Will it help or hurt us? n w r• We won't lose our total ability to advertise (but we likely will have more restrictions). We are by no means as strong as we were when we lost TV advertising. Brands like Virginia Slims and B&H do not have strong enough image at this point. 2 STRICTLY CONFIDENTIAL

Question (J. Moore/R. Murdoch): What is our strategy in Italy in reference to the government monopoly? How do we see the future in Italy? n w r: There was a change of govemment in Italy recently (coalition of new force). With respect to monopoly in Italy, we expect it to remain as an official monopoly. As it loses market share we need to worry that it remains viable. We don't want it to take action against us. We need to help the monopoly as we continue our growth (i.e. giving it some of our production to keep it in business). Question (R. Murdoc.h): What is the likelihood of European community ban on advertising? Answer: U.K., Holland, Germany, Greece and Denmark are committed to opposing the ban on tobacco advertising. Reelection of conservative government in the U.K. keeps the coalition alive. We feel well-protected at the moment. uestion (H. BrownL What is likely to happen post-'92 in the European community re. the freedom of trade across borders? n w r ECOFIN tax harmonization is a current issue. It is not clear whether tax harmonization will ever completely come into being because there is vested interests by the monopolies. Don't think there would be totally free circulation of goods in any case during this 5-Year Plan. Question (H. rownL Do we see formation of trading blocks causing barriers for our export efforts? Answer: It should not be materially different from what we see today during the period of the 5-Year Plan. Question (R. Penske): Manufacturing in Japan? Answer: It is a monopoly country and we are not allowed to produce. We license the manufacture of Marlboro with JTI and we export our other brands. 3 STRICTLY CONFIDENTIAL

Question (P. Douglas): We are forecasting to make over $600 million in Italy in 1996. Will this cause us problems? Are we investing money back into the country? n w • We are involved in a variety of "good citizen" activities in Italy (i.e. sponsorship of museum exhibits). We have strong brand positions and they should lead to strong market share in Italy. At risk is pricing freedom -- we need to work with the monopoly. Question (P. Douglas): Are we developing management sufficiently in order to expand as aggressively as we need around the world? Answer: We need to improve in this area, especially in Japan. K FN Question (J. Evans): Do we anticipate any downsizing in the Plan (in addition to what we have already done?). Answer: Yes, we are anticipating further consolidation at Kraft USA, GFUSA, and KGF Canada. We are still expecting the necessity to reduce costs and anticipate doing that without hurting the business. 4 STRICTLY CONFIDENTiAL

Saturda,y. Aoril 25. 1992 MILLER BREWING COMPANY Question (W. Donaldson): In reference to Sharps, what is the definition of non-alcohol? Answer: There are two definitions: 1. Alcohol-free -- Non-detectable 2. Non-alcohol -- Less than or equal to 0.5% alcohol Sharps is non-alcohol. Question (R. Penske): In reference to Miller distribution, why not look at putting corporate capital to work by buying our distributors. This would give us a competitive edge in the sales function, and we could make that work more efficiently by using outside suppliers to transport and warehouse the beer. Answer: We regularly look to buy distributors either to run them or to consolidate them to gain efficiency. In addition, we will consider your suggestion to use outside suppliers. Question (G. Weissman): Are we making good progress in Miller international activities? Answer: In 1991, sales were up 38%. We have a business in Canada where we license to Molson; we license to Courage in the U.K., we sell 1 million cases in Mexico; and there's Taiwan, Latin America exports, etc.. They are run on an opportunistic basis. We are discussing a broader relationship in Canada and Mexico. Question (H. Maxwell): Our #1 objective should not necessarily be to rejuvenate Lite beer, but instead should be to grow our total share in the low-calorie segment (i.e., including MGDL, etc.)? Answer: We agree that would be a better way to look at it; the point was just to emphasize that Miller Lite is very important to our profitability. 5 STRICTLY CONFIDENTIAL

KRAFT FOODSERVICE Question (J. Reed): How is the computer system going, since that was described in previous presentations as the basis for success in this business? Answer: The system is coming along but with a lot of problems. Question (J. Reed): Will it be ready by the end of this year? Answer: It is in place in many areas and most of the problems are already behind us; it is not perfect yet either. It is established and working well although it hasn't been implemented in all 40 districts yet -- we will be implementing in all districts by the end of 1994. KRAFT FOOD INGREDIENTS Question (G. Weissman): Why are we selling Bakers Chocolate when we have Suchard? Answer: Bakers is a commodity industrial chocolate business -- a totally different business with low margins. Question (J. A. Cordido-Fre es): We are in the salad oil business -- Do we also have a vinegar business? Answer: No, and we don't see any reason to. 6 STRICTLY CONFIDENTIAL

K F Question (J. Reed): What is the cost structure in Europe vs. the U.S.? n w r• Our G&A structure is leaner in Europe than in the U.S.. Kraft/GF businesses before they were merged were already efficient. Excess G&A is in Suchard. Question (J. Reed); What about distribution costs? Answer: It is more expensive today in Europe but they're working on a warehouse reduction program from 139 to 40. In the U.S. we have merged warehousing in Norcross. In Europe we are reducing costs differently by using separate outside suppliers and leasing. Question (R. Huntley): Is attracting and retaining management talent an issue? Answer: We have a good track record of holding on to key management in Europe and we are gearing up in Asia/Pacific but it is more difficult there because Chinese nationals are more mobile and easily leave to go to other companies. In Jacobs Suchard we are holding on to most of the key people. Corporate stock options have been beneficial in this respect. Question (R. Penske): , Your sales are doubling over the 5-Year Plan, but R&D is going up only modestly. Are you spending enough on R&D? Answer: R&D expenses are benefiting from the synergy of putting together the coffee labs of Jacobs Suchard and KGF. Also we have the benefit of research done in KGFNA (Maxwell House). We are spending more money on confectionary R&D which is a new core business for us. We benefit from basic research being done in Glenview (fat free, for example) while applied research is done in Europe. Question (R. Penske): How much are we spending on new product research? Answer: Approximately 20-25% of R&D spending is for new product research. 7 STRICTLY CONFIDENTIAL