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Philip Morris Inc.,Annual Report 1956 Year ended December 31, 1956 FJ = CO 0 9-. -_=~

Philip Morris Inc. j Annuai Report 1956 Contents Officers and Directors 2-3 Highlights of the Year 4 The President's Report 5-15 Special Pictorial Plant Tour 11-14 Audited Financial Statements 16-21 Financial Information 22-23 Products of Philip Morris Inc. 24 COVER: THROUGH THE DAYS AND INTO THE NIGHTS OF 1956. BUSY PHILIP MORRIS PEOPLE HERE IN THE MAIN ST.. RICHMOND. VIRGINIA PLANT. AS IN OUR OTHERS. TURNED THEIR HANDS AND SKILLS TOWARD ONE OBJECTIVE: MAKING THE FINEST CIGARETTES IN THE WORLD. 1

Officers Directors O. PARKER McCOMAS President O. PARKER McCOMAS, President JOSEPH F. CULLMAN, 3rd, Executive Vice President C. T. AMES, JR., Vice President* J. E. COOKMAN, Vice President DR. R. N. DuPUIS, Vice President W. H. HATCHER, Vice President G. J. HENN, Vice President RAY JONES, Vice President C. H. KIBBEE, Secretary and Treasurer R. P. ROPER, Vice President G. WEISSMAN, Vice President and Ass't. to the President H. R. BLUM, Controller J. A. HAMPSON, Assistant Treasurer CORNELIA CRAIG, Assistant Secretary PAULINE WAGNER, Assistant Secretary "Retires March 1, 1957. ALFRED E. LYON Chairman of the Board JOSEPH F. CULLMAN, 3rd Executive Vice President A H. E. RIDDELL, Wickes, Riddell, Bloomer, Jacobi & McGuire, Attorneys-at-Law B K. H. ROCKEY, Retired C HOWARD S. CULLMAN, Honorary Chairman, Port of New York Authority D DR. JESS H. DAVIS, President, Stevens Institute of Technology * L. G. HANSON, Retired Philip Morris Vice President and Treasurer F C. T. AMES, JR., Vice President in Charge of Operations p W. H.•HATCHER, Vice President in Charge of Leaf I I 2 2048018545

I TRANSFER AGENTS: Guaranty Trust Co. of N. Y., 140 Broadway, New York REGISTRARS: The First National City Bank of New York, 55 Wall Street, New York cn -k* ~ Bankers Trust Company, 16 Wall Street, New York COUNSEL: Conboy, Hewitt, O'Brien & Boardman, 39 Broadway, New York AUDITORS: Lybrand, Ross Bros. & Montgomery, 90 Broad Street, New York 3

$326,814,554 26,016,261 13,253,000 12,763,261 4.06 8,661,699 3,061,207 235,079,375 104,349,354 130,730,021 I 4

To the Stockholders of Philip Morris Inc. For the twelve months ended December 31, 1956, con- solidated net sales were $326,814,554 which repre- sented a 15~'Jo increase over the $283,218,646 reported for the previous year. Net income of $12,763,261 equivalent, after allowance for dividends on the Pre- ferred Stocks, to $4.06 per share on the Common Stock showed an increase of approximately 127o over the 1955 results. In addition to the regular dividends on the Pre- ferred Stocks, four quarterly dividends of 750 per com- mon share were paid during 1956 which represented the 29th consecutive year in which Philip Morris Inc. has paid dividends on its Common Stock. The total of $3.00 per common share paid during 1956 was the same as in the previous six years. In achieving the above sales figures, which repre- sent a record in the history of this Company, your management undertook five major merchandising moves in 1956: First was the placing of Marlboro in true national distribution by bringing production and distribution up to the outstanding public demand for this popular priced filter cigarette in a flip-top box. When the brand was introduced in 1955, sales and distribution were seriously impeded by unavoidable delays in the delivery of machinery. This situation was entirely corrected as we entered 1956 and aggressive sales force efforts built distribution and inventory levels in all principal out- lets to a point consistent with the requirements of a national brand. The growth of the brand has fully justified the substantial amount of time, money and research which were expended on it. Today it is one of the top ten brands in America. In all major areas of the country it is one of the leading filter cigarettes. We have also been very gratified by its increasingly favorable acceptance in many foreign countries. Second was the conversion of the king size Philip Morris in a soft package to the long size Philip Morris Philip Morris Leaf Vice President T. H. Hatcher (left), President 0. Parker McComas, Esecutive Vice President Joseph F. Cuilman, 3rd, and Director Dr. Jess Davis discuss leaf market trends with Universal Leaf Tobacco Company Board Chairman, J. Pinkney Harrison. 5

in the flip-top box. This move was taken because of the enthusiastic consumer acceptance of the Marlboro flip-top box and was further reinforced by extensive market research and sales testing. Third was the introduction of a new Parliament in a handsome blue, gold and white flip-top box at only a slight premium, about 20 per pack at retail, above popular priced filters. We were able to market this new recessed white-tipped filter cigarette at a substantial reduction from the former price because of the pro- duction efficiency of new machinery which became available to us during the year. Fourth was the change in name of the former Parlia- ment to Benson & Hedges. These are exactly the same luxury filter mouthpiece cigarettes, in the custom flat box, as the former Parliament. Fi f th in our series of moves was the launching of new filter Spud, a popular priced filter cigarette whose flavor is freshened by a light touch of menthol. This is the first time in tobacco industry history that a cigarette company has launched and placed in na- tional distribution five major brands within a twelve month period. These marketing moves and packaging changes rep- resented a tremendous undertaking for your Company and its personnel. How well they met the challenge is evidenced by the fact that your Company's sales in- creased over 15oJo in 1956 against an estimated average industry dollar increase of 4%. The extensive costs of such moves are reflected in the fact that the per- centage increase in our profits was less than that in our sales. However, your management believes that this policy was necessary to maintain our progress in the cigarette industry's development and to seize an opportunity to build for the future. We believe we have demonstrated that through the continued use of modem marketing and packaging techniques, we can outpace and outgain the industry-given the courage, the will and the personnel. It is to the latter to whom I wish to pay particular tribute. Our sales force, small by comparison with our major competitors, is to be highly commended for having achieved such excellent distribution and dis- play of our brands. Stimulated by the new brands and with morale at a high peak, they not only accomplished a significant conversion of smokers to our brands, but in cooperation with our Distribution and Operations Departments, kept returns on discontinued styles to an absolute minimum. Once again, the essential co- Philip Morris National Sales Manager John R. O'Connor (left), Executive Vice President Joseph F. Cullman, 3rd, and Sales Vice Yre<ident Hay Jones plan sales force role in the Company's 193 7, multi•hrand marketing strategy. Pictured at the occasion of the announcement of the Philip Morris College Scholarship Plan are President 11cComas with Dr. Wilson Compton, President of the Council for Finan- cial Aid to Education, Inc. (left) and Wesley W. Walton, Director of Sponsored Scholar• ship Services of the Educational Testing Services of Princeton, New Jersey, adminis• trator of the Plan. Brand Managers meet to co-ordinate activities. (Standing) John R Latham, Philip Morris and Spud; (seated, left) Hugh Cullnian, Parliament and Benson & Hedges, and Ross Millhiser, Marlboro. I 6 2Q4$t} 1$ s49

Philip )furris f'resident O. 1'arkcr \lr•(:ornas i riAltt ) and ~Icnor l:;rrlu- A. racta. l'rr~i• .1,•nt of TaGaralora \acional. ~. A., (left) dcmonstrate Philip Nforris niudcrn rnrtlt- ods of n anufacturc to Scitor Ricardo M. Arias. then Prcsi- dent of thc licpublic of Pan- a na an l pre•scnt Panaenanian lmbassador to the U. S., at the formal opening of the inodcrn Tabacalcra Nacional Panamanian plant which will produce Philip NIorris and \larlboro in that ronntrv un- der a licensin_ arrangement. Philip Morris' famed living trademark, "Johnny," makes his fourth annual ap- pearance in the Veterans of Foreign Wars' Loyalty Day Parade in New York City. operation of all levels of the distributive and retail trades played a primary role in the success of these merchandising moves.  The product and packaging changes obviously made 1956 a busy and active year for the Operations De- partment. The proper scheduling of production, pur- chasing and the training of the necessary additional personnel to meet the shipping schedules for the in- troduction of five new brands was an achievement of great moment. In spite of higher leaf costs, higher wages, higher costs of material, increased employee benefits and a general rise in other costs coincident with the changeover of brands, the efficiency of this Department in controlling costs was outstanding. Despite imperative concentration on immediate tasks during the year, the Operations Department was able to continue its very productive program of basic engineering and machinery development, thereby creating a reservoir of product and production im- provements which we expect will have a beneficial effect on consumer acceptance, quality and costs of our products in the future. To make our marketing moves possible, we have expended $12,745,000 over the last two years on new fixed assets. We will continue to invest considerable capital funds in new modern equip- ment. The coordinated efforts of the Operations De- partment, Market Research and Packaging Depart- ments, the Leaf Department and the Research and Development Department are geared to a long range program of not only satisfying the consumer of 1957 but anticipating the desires of the consumer of 1962. The 1956-57 tobacco crop was of good quality, but the great demand for Burley of high flavor was a very unsettling factor on the prices for this important type of tobacco. As a result, a slight increase in the cost of leaf used in manufacture will be incurred next year.  The Company's aggressive research program was continued and expanded during the year and will be further increased during 1957. Our planned expendi- tures this year will be approximately three times as large as they were only three years ago. Because of our strong belief that research will continue to con- tribute importantly to the welfare and progress of your Company, we are planning to establish an en- larged modem research laboratory which should per- mit the Department to operate much more efficiently and effectively than in its present quarters. Once again the Research and Development De- 7

N EW FI LTER SPU D Freshens the smoke...something w n P ! This is how freeh your mouth will taste sfter you smoke NEW FILTER' SPUDS. These new and different filter cigarertes from Philip Morris have a light touch of meothol thst &eshen® the smoke-somethin¢ ¢nndrr/u1! It is happy for you that you possess the art o( pleasing with delicacy. )ar n- Impact upon the smoking public and individ- uality of product identity are achieved through advertisements such as these created and placed by our national advertising agencies: Philip Morris N, W. Ayer & Son, Inc., Phila. Parliament and Benson & Hedges Benton & Bowles, Inc., N. Y. Marlboro Leo Burnett Co., Inc., Chicago Spud OgiTvy, Benson & Mather Inc., N. Y. Strike up a friendship witti new PARLIAMENT Eepect to 6nd in Benson & Hedga mtain pleuims nc other C$atetfe offat. Lltttaiq6 6avor, CIuzC ul tafte. Co.tlier tabaccos, metlcvlwrly blended. dguctl~ bmc, aatcm-t.ibted. Rlter mouthpiece, reccsxd ro that aaly the Havcr toYCh. yma lipt. A& HENSON 8 HEDGES:..Retu6rndKtrg 5:a c.u~xe, Iln.YrYZwNf..a~«~vy...~y. *o..,. aa...r.w..aw..ow.r arsrnu~ 540..IV.!lrf.Yw..Y(.~.1~N..i It "I - ~ ~ ..,,.k...,...a_.,.....-., ...,a~.~....~......~>r~...,....ew

partment made important contributions to our basic scientific knowledge of the constituents of tobacco and smoke and of techniques for analyzing our products. More than twenty technical papers were presented by this group before scientific bodies. A number of patents ""ere issued here and abroad to the Company. Increas- ing application of research findings is being made in our factories, leaf and purchasing operations.  During 1956, your Company's advertising programs reflected steps taken during the prior two years to prepare for major marketing efforts on each of our brands. Important among these steps was the appoint- ment of separate agencies to handle each of our brands as individual and distinct marketing problems. These agencies have impressive records in marketing a variety of products. Another phase of our advertising program was the maintenance of flexibility in all media to give proper advertising support at the appropriate times to our new products as they were introduced locally, region- ally and, finally, nationally. In this connection your Company has developed one of the most valuable franchises in television for spot announcements. During the last quarter of 1956, the Marlboro brand co-sponsored the professional football network tele- casts, reaching nearly 200 markets, many of them not previously penetrated by our advertising for the brand. The reaction has encouraged us to plan continued use Packed houses at every performance attest to the success and popularity of The Philip Morris Country 3lusic Show. Traveling in a specially equipped bus, this troupe of welI-known musicians and singers is carrying the Philip Morris message of goodwill to lovers of country music all over the South ... another Philip Morris "first" t:o-.pon:or.,hip of professional football over 186 CB>-TV stations marked NTarlhoru's debut on network TV in thc• fall season of 1956. On January 3rd this succe~sful new filter-tipped cigarette b<•rame a ro-sponGor of the tirizc•-«inning (.R~-TN' dramatic serics, I'lrnhntrse 90. of network programming in the year ahead. In Janu- ary 1957, Marlboro began co-sponsorship of the dis- tinguished Playhouse 90 series, a major dramatic series, over 128 CBS-TV network stations each Thursday night. In April, we will co-sponsor the popular Baseball Game of the i4eek Saturday afternoons over the CBS- "I'V network in 170 marketing areas. The professional football telecasts will be resumed in the fall. We are sponsoring a new show, The Philip Morris Country Rlusic Show, which will tour through and perform daily in the South, broadcasting each Friday night over a Southern regional radio network. Advertising in 1957 will also include aggressive pro- grams in newspapers, Sunday supplements, outdoor billboards, magazines and spot radio, each campaign tailored to the needs of the individual brands. Along with other costs in the general economy, ad- vertising costs rose during 1956, and we anticipate further increases in 1957. However, paralleling these rising costs there has also been a significant increase in your Company's total impact upon the public. As we support five brands, instead of the one brand we supported just a few years ago, we are embarked on the strongest advertising program in our Company's history. 0 Our Overseas Division, which was set up late in 1955, had an active and successful year. Sales of our own products overseas were up some 10%, which was