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735 197 10 15 2O 25 AD very aggressive marketplace. So-those sorts.-of-funds--allocated for the first three (3) years of a new brand are disporportionately high and had we projected this out for ten (I0) years, that proportion would have diminished once the brand was established. Now, was third family targeted against any particular brand in the marketplace and, if so, is that what I see on page nineteen (19) of this? Yes. At the time of the writing of this plan, we looked very carefully at our competition and third family was particularly directed at the brand Craven, which was one of the brands of Rothmans, and against DuMaurier, perhaps the strongest brand in the segment; certainly the strongest brand in the segment which was an Imperial brand. So that looking at the strategic plan you will see, then, a general allocation by percentages of available resources as forecast over the next three (3) days, and we'll-come back to that plan, but I would like to go now, so the Court may have an immediate idea, and ask you, Mr. Hoult, in general terms, how much you have been spending or were spending on advertising prior to the ban, and I have ... Now, Mr. Hoult, I had asked you if you could have AUDIOTRANSCRIPT, Divisio~ d, Pi~rr~ Vilalr~ & As~o~i6s Lt~e

736 198 5 i0 15 2O 25 prepared a document which would show your total advertising and promotional spending,-.historically going from nineteen eighty-seven (1987) back to nineteen seventy-six (1976), with a breakdown, not in great detail, but a breakdown. Is this the document which... A- Yes, it is. Q- ..shows that? Can I have that marked, please, as RJR... THE COURT: 3. Me IRVING: 3. Q- Let's just take one (i) year, Mr. Hoult, and if you could just explain tO His Lordship what these figures represent? A- Which year would you... Q- I think we'll take nineteen eighty-seven (1987) and -- I see it's three fifteen (3H15), My Lord, if you were going to take the afternoon adjournment, as planned, I'll leave this until we come back. If not, I'll just carry on. THE COURT: We'll take a ten (i0) minute break. SHORT RECESS AUDIOTRANSCRIPT, Division de Pierre Vilalre &

737 199 i0 15 2O 25 Me IRVING: Q - Now, Mr..Hoult,.looking.at~RJR-3, let,s take..a single year -- it won't be necessary to do it for more than that -- take nineteen eighty-seven (1987). THE COURT: Q - Okay, are we dealing in -- I can't read the top of the page. A - Canadian dollars, My Lord. Q - Yes, Canadian. Me IRVING: Thousands of dollars. THE COURT: Thousands? Me IRVING: Yes. THE COURT: So I have to multiply the number by one thousand (i,000)? Me IRVING: Just add.three. (3) zeros. So that print advertising then is one point four (1.4) million dollars? Correct. And the signs are six point eight (6.8)? Correct. AUDIOTRANSCRIPT, Division de Pierre Vilc, ire& Assoc;4s Lt4e

738 200 i0 15 2O 25 Am Now, what is production? Production is.the cost. that.an..advertising agency and its printers incur in producing the advertisements, either in magazines, billboards or -- or for -- so that's the actual printing cost. All right. And agency fees, is that the ad agency? Yes, this is the fee that an advertising agency gets for giving you its service over the year, and that fee is based conventionally as a proportion of your total billings, your total advertising expenditures. Now, point of sale? Point of sale is that material which is used in the retail outlets. Conventionally, point of sale would be paper or cardboard. We have sponsorships, which you've already dealt with. What is research, first of all? Research, in this context, refers to marketing research, and that is the cost of carrying out our consumer studies of various sorts and it amounts to the fees which we pay. to our~market research agencies who. do ~this work for us. Finally, and by far the largest item, is retail. What is that? Retail is the sum total of all payments that you make to the retail trade, either in cash or in products, in AUDIOTRANSCRIPT, Division de Pierre Vilalre & Associ4s Lt4e

739 201 l0 15 20 25 order for you to, for example, put up a counter unit display-wher~e~you'.re,-say, having, a~specialoon Vantage, you will have a counter unit, you would pay for that. You also pay for the amount of space behind the counter typically, that you are buying to display your products. Now, in our case, as a company, we have sales cycles which each are six (6) weeks in length. And each sale cycle has a special program and you pay the retail trade for this. Q - Just follow His Lordship's pen a bit, Mr. Hoult, because His Lordship is trying to take notes as we go along, so try to keep the timing. THE COURT: No, numbers is okay. Me IRVING: Q - All right, so that, RJR-3, now... THE COURT: Q - I see that has increased a lot since nineteen seventy-six (1976) in the retail... A - Yes. Q - ... versus the rest of the... A - That is a very -- very marked phenomenon, not just in our business but, I think, in marketing generally, that as the power of the retail trade increases versus the manufacturer, the demands for the sorts of things I've AUDIOTRANSCRIPT, oi,,i~ioo d~ P~ Viloi~ & A,socie, Lt~e

740 202 l0 15 20 2S described. And in our particular case, with a very aggressive indust~ry, with brands fighting each other all of the time, it's a normal economic law of supply and demand. There's a limited amount of space that you can buy and the price has gone up, as you.., as you have pointed out. Me IRVING: Q - Now, Mr. Hoult, we have looked at a sort of general allocation of funds over a three (3) year period in the strategic plan, we have looked at the overall amounts you've been spending. I'd like now to come to the process by which an actual advertising budget gets put together within your company. Where does it start? A - The evaluation of the market is an ongoing process and that comes together, as I pointed out, in the strategic plan. And in the course of putting together a strategic plan, there are all sorts of people in the company who are making cases for priorities, spending and so forth. In a company like ours, which I described as a market-driven company, these demands are-coming from below by, essentially, the brand management group. These are -- there's a group of professionals, each of whom is responsible for a brand. Now, a professional has the responsibility of monitoring and evaluating the competitive brands to his AUDIOTRANSCRIPT, Di~i,ioo de Pierre Vilaire & Associgs Lt@e

741 203 io Q- A - 15 Q- A - 20 25 own brand all of the time, and that is the basis, the beginning of the.budgeting~process, the recommendations from brand management groups. Okay. So just to take an example, Mr. Hoult, you've mentioned the brand Export. So is there a brand manager for Export... Yes. ... in the company? Yes. And would there be a brand manager then for each of the other major brands as well? For all the major brand family, certainly. Some of the smaller ones would be combined. There would be a brand manager looking after three (3) or four (4) minor brands. But the major brands, yes. So let's -- starting with the brand manager and looking at the creation of an overall advertising budget, what is his role? Well, as I said, the preliminary role -- not the prime role --.but the preliminary role is to be.absolutely fully informed at all times of the current performance of his or her brands, the potential, is the growing brand steady, declining, and equally importantly, at all times knowing what the competitive situation is for the competitive brand that's fighting that particular brand AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associgs L,~e

742 204 5 i0 15 20 25 in the marketplace. With this ongoing knowledge and information, he or. she would be .essentially responsible for putting forward a proposal to the next layer of management to obtain the resources and funds to attain a certain goal, which that person would commit to: "Give me so much and I will deliver you so much in terms of share or volume." THE COURT: Q - Okay. He makes his proposal to who? A - Well, normally the brand manager would be making his proposal, at this time of the year, for the strategic plan, to the Marketing Vice-President, I think. The Marketing Vice-President would put together all of these individual plans and he or she would then make a very formal market plan submission to me, as I was, as the C.E.O. And I would be evaluating their recommendations, testing their commitments and ultimately one of my major responsibilities as the C.E.O. was to determine how resources should be allocated. Me IRVING: Q - Okay. Now, I'd like to come back to the brand manager for a moment, because you said that one of the brand manager's responsibilities was to look at the competition. And what is the brand manager looking at, Mr. Hoult? AUDIOTRANSCRIPT, Division de Pierre Viloire & Associ~s Llge

743 205 I0 15 2O 25 A m Firstly, he or she is looking at performance on a very frequent basis,.and the Neilsen performance .that I have referred to earlier which indicates for every brand in the market what its consumer offtake is, what its distribution is, whether it's growing and so forth, are of prime -- prime importance. Secondly, it's an evaluation of activity and this activity comes back to us or to him or her in the head office from all sorts of sources, two (2) of the most important sources being market research, which would be commissioned on a, for a major brand, almost on an ongoing basis, and secondly from our sales force which we regard as our first line of intelligence in terms of what is happening in the marketplace. Now, I'd like to go back just for a moment to Tab 1 in the book, My Lord, page twenty-one (21). It is entitled "Market Spending by Brand", and going down the left-hand column, there are your brands, Export, third family Vantage and so on, and underneath that I see Player's, Du Maurier,~Matin~e and-then. "Total, Imperial Tobacco". And then moving along to the right, there are some numbers under the heading "Measured Media Expenditure". What are these figures that you have here for, say Player's? Measured media is really an expression, a literal AUDIOTRANSCRIPT, Division de Pierre Viloire & Associ~s Lt6e

744 206 5 15 A - Q- A - 2O Q- A - 25 Q- expression of what it is. It's the media exposure that you can measure.. And all advertising agencies, at least ours, have a service whereby they are monitoring at all times what individual brands are spending and what particular exposures they have. So that's a very reliable measure. It's published data, also, which the advertising agencies have access to and you can very easily calculate, from where they are appearing, what they can spend, because the costs of what they do are in the public demand. They're... So when I... They're public costs. When I look along the line for Player's, am I seeing what your estimate is of what Player's has been spending? Yes. For advertising? That is advertising as on billboards, magazines, newspapers. That would not include areas that couldn't be measured, with the same degree of .accuracy, like in-store activity. Okay. Or sponsorships, that would not be included in those figures. All right. So there's one column, "Major Media AUDIOTRANSCRIPT, oi,,i,lo,~ d~ Pi,rre Vilc~i:, & Associes