Project Star 2011: Presentation of results · KPMG LLP has agreed that the Report may be disclosed...

Project Star 2011: Presentation of results

Advisory - Strategic and Commercial Intelligence

19 June 2012

PRIVATE AND CONFIDENTIAL

The report is issued to you on the basis that it is for your information only and, save as may be required by law, is not to be disclosed, quoted or referred to, in whole or in part to any other party other than the Relevant Administrations, as defined in the Anti-Contraband and Anti-Counterfeit Cooperation Agreement dated 9 July 2004, and we ask you as well as the Relevant Administrations to maintain the confidentiality of the report. Should you choose to disclose the report to any Relevant Administrations you will ensure that they understand the basis on which disclosure has been made and shall provide them with a copy of this letter. Yours faithfully KPMG LLP

Tel +44 (0) 207 311 1000 Fax +44 (0) 207 694 8010

KPMG Transaction Services 15 Canada Square London E14 5GL

KPMG LLP, a UK limited liability partnership, is a member of KPMG International, a Swiss cooperative

Registered in England No OC301540 Registered office: 15 Canada Square, London E14 5GL

Private & Confidential European Commission European Anti-Fraud Office European Commission OLAF B-1049 Brussels Belgium 19 June 2012 Dear Sirs, KPMG Review of Tobacco consumption in the EU (Anti-Contraband and Anti-Counterfeit Cooperation Agreement) We attach a copy of a confidential report on tobacco consumption in the EU ("Report") which has been prepared by KPMG LLP in accordance with the specific terms of reference ("the terms of reference") agreed between Philip Morris International Management S.A. ("PMI") and KPMG LLP. KPMG LLP has agreed that the Report may be disclosed to you on the basis set out in this letter. KPMG LLP wishes you to be aware that KPMG LLP's work for PMI was performed to meet specific terms of reference agreed between PMI and KPMG LLP and that there were particular features determined for the purposes of the engagement. The Report should not therefore be regarded as suitable to be used or relied on by any other person or for any other purpose. Should you choose to rely on the Report you do so at your own risk. KPMG LLP will accordingly accept no responsibility or liability in respect of the Report to you or to any persons other than the addressees of the Report.

2


This document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Disclaimer

This report on tobacco consumption in the EU (“Project Star 2011 Results") has been prepared by KPMG LLP in accordance with specific terms of reference (“terms of reference") agreed between Philip Morris International Management S.A. ("PMI") and KPMG LLP. KPMG LLP wishes you to be aware that KPMG LLP's work for PMI was performed to meet specific terms of reference agreed between PMI and KPMG LLP and that there were particular features determined for the purposes of the engagement. The Project Star 2011 Results should not therefore be regarded as suitable to be used or relied on by any other person or for any other purpose. Should you choose to rely on this report you do so at your own risk. KPMG LLP will accordingly accept no responsibility or liability in respect of the Project Star 2011 Results to you or to any persons other than PMI.

3



Objectives for today

■ Provide an overview of developments in the EU illicit cigarette trade in 2011 identified as a result of Project Star. The presentation will cover; – Methodology – Market background and legal sales – Consumption and illicit market analysis – Source markets and brands – Review of PMI counterfeit and contraband – Conclusions

■ A document containing detailed results for each Member State will be available following the

presentation

■ KPMG is happy to provide clarifications or respond to questions both at the end of the session and on an ongoing basis

4



Agenda

Methodology

Market background and legal sales

Consumption and illicit market analysis

Source markets and brands

Review of PMI counterfeit & contraband

Summary

Appendix

5



Project Star uses legal domestic sales, Empty Pack Survey results and consumer research to determine counterfeit and contraband volumes

Based on Empty Pack Survey

results

Domestic consumption

Cig

aret

te c

onsu

mpt

ion

(cig

aret

tes)

Based on Empty Pack Survey

results

Based on consumer survey results regarding cross border purchases

Obtained by subtracting legal cross border

purchases from the total non-domestic volume

Non-domestic

Legal Domestic

sales

Outflows

Legal domestic

consumption

Non-domestic (legal)

Counterfeit and contraband

The Project Star methodology was developed by KPMG and approved by OLAF. It has been deployed on a consistent basis since 2006, enabling comparisons to be made between counterfeit and contraband

volumes from year to year.

6



Agenda

Methodology





Summary

Appendix

7



-10%

-5%

0%

5%

10%

15%

20%

25%E

ston

ia

Lith

uani

a

Latv

ia

Pol

and

Sw

eden

Slo

vaki

a

Aus

tria

Ger

man

y

Finl

and

Rom

ania

Mal

ta

Bel

gium

Fran

ce

Bul

garia

Hun

gary

Cze

ch R

epub

lic

Luxe

mbo

urg

Net

herla

nds

Den

mar

k

Irela

nd UK

Spa

in

Cyp

rus

Italy

Slo

veni

a

Por

tuga

l

Gre

ece

Per

cent

age

Real GDP growth was positive in all Member States except Greece and Portugal, however, unemployment in the EU27 remained high at 9.7%

Real GDP change and unemployment rate, 2011(1)(a)

Note: (a) Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices.

Source: (1) Eurostat, real GDP growth rate and unemployment rate, accessed April 2012

Unemployment EU 27 = 9.7%

Real GDP change EU 27 = 1.5%

Key: Annual change in real GDP 2011 Annual change in real GDP 2011 EU-27 Unemployment rate 2011 Unemployment rate 2011 EU-27

8



Price increases of over 5% were observed in 15 Member States in 2011

Key: Change in weighted average price 2010-2011 Change in weighted average price 2009-2010

Percentage change in weighted average price, 2010-2011(1)(a)(b)

Note: (a) Data labels for 2011 price change only (b) Weighted average pack price change calculated in local currency Source: (1) PMI Management and EU Tax Tables

-4.3%-0.2%

0.3% 0.4% 1.6% 2.6% 2.7% 2.9% 3.4% 3.8% 3.9% 4.0%5.2% 5.3% 5.6% 5.9%

7.2% 7.2% 7.5% 7.7%10.3%10.8%11.7% 12.4%12.8%

14.8% 15.3%

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%Sw

eden

Finl

and

Irela

nd

Bulg

aria

Hun

gary

Ger

man

y

Mal

ta

Cze

ch R

epub

lic

Lith

uani

a

Gre

ece

Italy

Aust

ria

Slov

akia

Slov

enia

Fran

ce

Belg

ium

Portu

gal

Luxe

mbo

urg

Den

mar

k

Latv

ia

Rom

ania

Pola

nd

Net

herla

nds

UK

Spai

n

Esto

nia

Cyp

rus

Perc

enta

ge c

hang

e

9



Price differentials between Member States and neighbouring countries remained significant

Key: €6.00 or more €5.00 to €5.99 €4.00 to €4.99 €3.00 to €3.99 €2.00 to €2.99 Less than €2.00 Notes: (a) Based upon the price of a pack of 20

Kent cigarettes, a comparable premium brand, as Marlboro is not sold in Belarus

(b) A number of price changes took place in Spain between April and October in 2011, the average Marlboro price for the year per IMS data is €4.15

Source: (1) PMI Management and EU Tax Tables

Map denotes Marlboro price per 20 cigarettes at 1 July 2011(1)

Estonia €3.00

Latvia €2.85

Malta €4.00

17%

UK €7.91

Spain €3.85(b)

France €5.90

Italy €4.60

Germany €5.16

Poland €3.00

Czech Republic €3.46

Ireland €8.55

Sweden €5.75

Finland €5.00

Lithuania €2.58

Hungary €2.49

Slovakia €3.37

Greece €4.00

Cyprus €3.85

Slovenia €3.20

Denmark €5.36

Belgium €5.05

Netherlands €5.47

Luxembourg €4.40

Ukraine €1.00

Norway €11.09

Romania €2.90

Russia €1.37

Switzerland €6.00

Portugal €4.00

Bulgaria €2.56

€1.37

Turkey €3.56

Moldova €1.05

Croatia €2.97

Serbia €1.71

Albania €1.61

Montenegro €1.70

Macedonia €1.94

B-H €1.69

Belarus(a)

€1.11

Austria €4.40

Andorra €2.40

Morocco €2.88

Canary Islands €2.30

Algeria €1.46

Tunisia €2.21

Libya €1.36

Egypt €1.33

10



In 2011, the steepest falls in legal domestic sales were observed in the Mediterranean region

Percentage change in legal domestic sales for EU-27, 2010-2011(1)

Source: (1) In Market Sales provided by PMI

EU 27 = -3.2%

-15%-14%

-13%

-5% -5% -5% -4% -3% -3% -3% -3% -2% -2% -2% -2% -1% -1% -1% -0%

0% 1% 1% 2% 2%

7%9%

11%

-20%

-15%

-10%

-5%

0%

5%

10%

15%S

pain

Cyp

rus

Gre

ece

Mal

taP

ortu

gal

Irela

ndE

ston

iaD

enm

ark

Net

herla

nds

Aus

tria

Pol

and

UK

Italy

Hun

gary

Slo

vaki

aFr

ance

Bul

garia

Slo

veni

aC

zech

Rep

ublic

Luxe

mbo

urg

Ger

man

yB

elgi

umFi

nlan

dS

wed

enLa

tvia

Lith

uani

aR

oman

ia

Per

cent

age

chan

ge in

LD

S

11



Total EU legal domestic sales declined by 3.2% in 2011, compared with a 6.1% fall the previous year

Historic Legal Domestic Sales for EU-27, 1997-2011(1)

Note: (a) Romania and Bulgaria have been included at 2007 levels for each of the years 1997-2007 Source: (1) In Market Sales provided by PMI

Key: EU 27 Countries(a)

800 804 810 789 793 800 771729 698 687 677 658 634

595 576

0

200

400

600

800

1,00019

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Vol

ume

(bn

ciga

rette

s)

12



Summary of market background and legal sales

Despite growing economic concerns, real GDP increased in 24 of the 27 Member States in 2011 ■ The strongest real GDP growth was observed in the Baltic States, although unemployment remains high in that region

■ The unemployment rate also exceeded 10% in Spain, Greece, Portugal, Ireland, Slovakia, Bulgaria and Hungary

Total EU legal domestic sales declined by 3.2% in 2011, compared with a 6.1% fall the previous year ■ The steepest declines in legal domestic sales during 2011 were observed in the Mediterranean region

Price increases of over 5% were observed in 15 Member States in 2011 ■ Price differentials between Member States and neighbouring countries remained significant

– The price of a pack of 20 Marlboro King Size ranges from €2.49 in Hungary, to €8.55 in Ireland

– Prices range between €1.00 and €11.09 for 20 Marlboro King Size in countries bordering the European Union

13



Agenda

Methodology





Summary

Appendix

14



In 2011, total consumption declined while consumption of non-domestic products increased slightly

EU consumption by type, 2006-2011(1)

Key: Non-domestic Legal domestic consumption

Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

13 51 15 2136

20

594 584629 616 599 561 540

88 8691 89 86

88 89

682 669720 706 685

649 629

0

100

200

300

400

500

600

700

800

EU 2006 Change in consumption

2007 (EU25 only)

Accession of Romania & Bulgaria





EU 2011

Volu

me

(bn

ciga

rette

s)

15



4.5% 4.2% 4.1%3.7% 3.7% 3.7%

8.3% 8.4% 8.6% 8.9%9.9%

10.4%

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011

% o

f Tot

al C

onsu

mpt

ion

The share of counterfeit and contraband consumption increased to 10.4%, or 65.3 billion cigarettes, in 2011

ND(L) and C&C share of total consumption 2006 – 2011(1)

Source: (1) EU Flows Model 2006 - 2011

Key: Non-domestic legal Counterfeit and Contraband

31.0 30.3 29.0 25.0 23.7 23.3

56.8 60.6 60.5 61.1 64.2 65.3

ND(L) volume (bn cigarettes)

C&C volume (bn cigarettes)

16



Latvia, Lithuania and Bulgaria remain the markets with the highest illicit product incidence, but all three experienced declines in illicit consumption levels in 2011

C&C share of consumption by country 2010 – 2011(1)

Source: (1) EU Flows Model 2010 - 2011

2011 C&C volumes (bn) 0.8 1.1 2.7 1.0 0.3 10.7 0.9 14.0 6.7 0.1 1.9 3.1 1.6 2.7 5.0 0.6 4.6 0.2 0.7 4.8 0.5 0.6 0.3 0.2 0.0 0.0 0.1

31.6

%

31.3

%

20.2

%

17.8

%

17.5

%

15.8

%

15.4

%

13.1

%

12.9

%

12.2

%

11.6

%

11.1

%

10.2

%

10.1

%

10.1

%

9.2%

7.2%

6.3%

5.9%

5.3%

3.8%

3.6%

3.0%

3.0%

1.9%

1.1%

0.7%

0%5%

10%15%20%25%30%35%

Latv

ia

Lith

uani

a

Bulg

aria

Irela

nd

Esto

nia

Fran

ce

Finl

and

Ger

man

y

Pola

nd

Mal

ta

Aust

ria

Rom

ania

Net

herla

nds

Gre

ece

UK

Swed

en

Spai

n

Slov

enia

Belg

ium

Italy

Hun

gary

Cze

ch R

epub

lic

Portu

gal

Den

mar

k

Luxe

mbo

urg

Cyp

rus

Slov

akia

C&

C %

sha

re o

f to

tal c

onsu

mpt

ion

-5.3

-9.4

-10.

5

-1.5

0.8 2.

1

-0.5

0.6 2.

2

1.4 2.

6

-8.1

-0.7

3.8

-0.5

-1.3

4.8

1.0

0.0

0.4

-1.7

-1.9

0.7

-1.3

-3.9

0.5

-0.5

-12-10

-8-6-4-20246

Cha

nge

in C

&C s

hare

of

tota

l con

sum

ptio

n (p

p)

17



The share of C&C consumption accounted for by the Mediterranean region increased to 19.3% in 2011, whilst the share of the Eastern border countries declined significantly

Share of total C&C inflows by destination regions, 2006-2011(1)

Classification of markets

Key: Mediterranean EU countries – Cyprus, Greece, Italy, Malta, Portugal and Spain Eastern border EU countries – Bulgaria, Estonia, Finland, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia Western and Central EU countries – Austria, Belgium, Czech Republic, Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Slovenia, Sweden

and UK Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

66.5% 63.0% 66.5%58.4% 54.7% 55.9%

19.4% 23.1%24.6%

31.3%32.1% 24.8%

14.1% 13.9% 8.9% 10.3% 13.2% 19.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Shar

e of

tota

l C&C

(%

)

18



8.0 8.4 5.4 6.3 8.5 12.63.5% 3.7%

2.4% 2.9%4.1%

6.5%

0%

5%

10%

15%

20%

05

1015202530354045

2006 2007 2008 2009 2010 2011

C&

C share of consum

ption (%)C

&C

vol

umes

(bn

ciga

rette

s)

C&C volumes (bn cigarettes)

C&C share as total consumption (%)

Counterfeit and contraband increased significantly in the Mediterranean countries in 2011 to account for 12.6 billion cigarettes and 6.5% of consumption

C&C inflows to Mediterranean EU countries, 2011(1)

Key: EU – Mediterranean countries Source countries with inflows of over 1 billion cigarettes in 2011 C&C flows of over 0.4 billion cigarettes in 2011 Note: (a) ‘Unspecified’ refers to packs which do no bear any specific market

or Duty Free labelling Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic

sales and non-domestic (legal) research

Unspecified(a)

19



In 2011 counterfeit and contraband as a share of consumption in Eastern border countries declined to close to the 2009 level

Unspecified(a)

C&C inflows to Eastern border EU countries, 2011(1)

Key: EU - Eastern border countries Source countries with inflows of over 1 billion cigarettes in 2011 C&C flows of over 0.4 billion cigarettes in 2011 Note: (a) ‘Unspecified’ refers to packs which do no bear any specific market



11.0 14.0 14.9 19.2 20.6 16.2

9.9%8.7% 9.5%

12.6%

15.4%

12.7%

0%

5%

10%

15%

20%

05

1015202530354045

2006 2007 2008 2009 2010 2011

C&

C share of consum

ption (%)C

&C

vol

umes

(bn

ciga

rette

s)




20



Counterfeit and contraband share of consumption and volumes in the Western and Central EU markets increased slightly in 2011

Unspecified(a)

C&C inflows to Western and Central EU countries, 2011(1)

Key: Western and Central EU countries Source countries with inflows of over 1 billion cigarettes in 2011 C&C flows of over 0.4 billion cigarettes in 2011 Note: (a) ‘Unspecified’ refers to packs which do no bear any specific market



37.8 38.240.3

35.7 35.1 36.5

11.1% 11.5% 12.4%11.3% 11.3% 11.9%

0%

5%

10%

15%

20%

05

1015202530354045

2006 2007 2008 2009 2010 2011

C&

C share of consum

ption (%)C

&C

vol

umes

(bn

ciga

rette

s)



21



Summary of consumption and illicit market analysis

Total consumption declined at a rate of 3.1% to 629 billion cigarettes in 2011 ■ Despite this decline, consumption of non-domestic increased slightly to 89 billion cigarettes

Counterfeit and contraband increased to 65.3 billion cigarettes, representing 10.4% of total consumption, up from 9.9% in 2010 ■ Latvia, Lithuania and Bulgaria remain the markets with the highest share of illicit products, but all three experienced declines in

counterfeit and consumption levels in 2011

The share of illicit cigarette consumption in Mediterranean countries increased significantly in 2011 ■ C&C share of consumption in this region increased to 6.5% in 2011, up from 4.1% the previous year and equivalent to 12.6 billion

cigarettes

– Spain and Greece have seen significant increases in the volume of counterfeit and consumption consumed in 2011 compared to 2010

In 2011, counterfeit and contraband volumes in Eastern border countries declined for the first time since 2006 ■ Significant declines in counterfeit and contraband consumption were observed in Romania and Bulgaria during 2011; these countries

had previously experienced rapid growth in the illicit trade since 2007

Counterfeit and contraband volumes increased slightly in the Western and Central EU countries in 2011 ■ This increase was primarily driven by France and Germany, whilst volumes in Czech Republic and the UK declined

■ Despite this growth, C&C in these regions remains below the 2008 high, both as a share of total consumption and in volume terms.

22



Agenda

Methodology





Summary

Appendix

23



C&C inflows by origin, 2006-2011(1)

Key: PMI counterfeit EU Non-EU


The share of counterfeit and contraband originating from outside the EU remained broadly stable in 2011 at 60%

40% 42% 46%56% 61% 60%

53% 52% 48%39% 35% 36%

7% 6% 6% 5% 5% 4%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Per

cent

age

of to

tal C

&C

24



The illicit consumption by source market highlights the different nature of the challenges faced across the EU


Contraband inflows by origin, 2011(1)

Eastern border EU

countries Mediterranean EU

countries Western and Central EU

countries

Non-EU73%

EU23%

PMI counterfeit

4%

Non-EU40%

EU56%

PMI counterfeit

4%

Non-EU96%

EU2%

PMI counterfeit

2%

25



1% 7% 7% 11%18% 13% 18%

18% 14% 8%

10%9%

10%11%

10% 8%0%1%

3%5%

7%2%

3%

5%4% 3%

1% 2%1%

2%3%

3%10% 16%

12%

11% 18% 20%7% 6%

6%

5%5% 4%

10% 12%11%

13%12% 13%

2%3% 3%

2%5% 6%

3%5% 3%

3%2% 2%

1%0% 1%

1%1% 1%

9%7% 9%

5%3% 1%

1%1% 1%

1%1%

1%26% 23% 21%

15% 12% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Per

cent

age

of to

tal C

&C

Other EU

Slovenia

Spain

Hungary

Romania

Czech Republic

Poland

PMI counterfeit

Other non-EU

Serbia

Moldova

Belarus

Russia

Ukraine

Unspecif ied

Unspecified products have become the largest source of illicit products from outside the EU, as Russian and Ukrainian inflows have declined

C&C inflows by origin, 2006-2011(1)


Unspecified packs are packs which do not bear any specific market or Duty Free labelling

26



Unspecified products increased rapidly to 7.0 billion in 2011. All Unspecified brands are classed as illicit whites

C&C inflows by origin 2011(1)


Unspecified contraband inflows from non-EU countries, 2009-2011(1)

4.2

4.7

7.0

0

1

2

3

4

5

6

7

2009 2010 2011

Billio

n ci

gare

ttes

49%

11%4%

36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011

Perc

enta

ge o

f tot

al C

&C

EU

PMI counterfeit

Unspecified

Non-EU

27



The growth in Unspecified products has been driven by increased consumption in the Mediterranean countries

Key: No Unspecified observed Accounts for 0% - 0.49% consumption Accounts for 0.5% - 0.9% consumption Accounts for more than1.0% consumption Note: (a) Unspecified refers to packs which do no bear any specific market or Duty Free labelling Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

Unspecified share of total consumption 2009-2011(1)(a)

2010 2009 2011

4.7bn 4.2bn 7.0bn

28



Karelia, Kaanee American International Tobacco and H. Van Landewyck accounted for 44% of Unspecified volumes consumed in the EU in 2011

C&C inflows from Unspecified market by manufacturer, 2011(1)


100% = 7.0 billion cigarettes

Selected brands for major manufacturers of UnspecifiedManufacturer BrandKarelia Tobacco American Legend

Karelia

Unknown manufacturers GoalAmigosLampsi

Kaanee American International Tobacco Gold Mount

H.Van Landewyck Gmbh DucalAustin

Explosal Ltd. RaquelGold Classic

European Tobacco PresidentHD

Ray Tobacco Walton

All Unspecified brands are classed as illicit whites

Karelia Tobacco

23%

Unknown manufacturers

13%

Kaanee American

International Tobacco

12%

H.Van Landewyck

Gmbh9%

Explosal Ltd.8%

European Tobacco

4%

Ray Tobacco3%

Others28%

29



0.2 1.0

3.44.6

3.3 2.50.7

2.6

2.7

2.22.0

0.4

1.0

1.9

0.91.5

0.2

0.6

1.6

3.46.5

-

0.4

2.1 2.8

3.2

0.2

2.4

8.0

12.9 12.7

15.7

0

4

8

12

16

2006 2007 2008 2009 2010 2011

Volu

me

(bn

ciga

rette

s)

Other Unspecified brands

Growing illicit white brands

American Legend

Jin Ling

Classic

Illicit white volumes increased to 24% of counterfeit and contraband volumes despite the decline of Jin Ling and Classic

% of total EU C&C 0% 4% 13% 21% 20% 24%

Note: (a) This analysis covers illicit white brands with an inflow greater than 200 million sticks in 2011 as well as Unspecified brands. Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

Consumption of key and growing illicit white brands, 2006-2011(1)(a)

In 2011, 18 Illicit White brands had volumes of over 200 million cigarettes

30



0.2 0.51.20.0

0.9

0.20.4

0.8

0.2

0.3

0.6

0.1

0.4

0.5

0.2 0.2

0.2

0.7

0.40.4

0.2

0.4

0.3

0.3

0.1

0.3

0.2

0.4

0.30.2

0.2

0.1

0.1

0.2

0.2

0.1

0.1

0.2

0.1

0.2

0.00.2

0.6

1.6

3.4

6.5

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011

Volu

me

(bn

ciga

rette

s)

Queen Magnat

GR Austin

NZ Kiss

CK Marble

Ducal Raquel

Fast Premier

Minsk Gold Mount

Fest

The share of counterfeit and contraband flows accounted for by fast growing illicit white brands doubled in 2011, reaching 6.5 billion cigarettes

% of total EU C&C 0% 0% 1% 3% 5% 10%

Note: (a) Fast growing illicit brands are defined as those with an inflow greater than 200 million sticks in 2011 Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

Consumption of growing illicit white brands, 2006-2011(1)(a)

31



The share of counterfeit and contraband accounted for by Marlboro, Viceroy and Classic declined whilst the share of Pall Mall, Route 66, American Legend and a number of growing illicit white brands increased in 2011

C&C inflows by brand, 2006-2011(1)(a)

Note: (a) Growing illicit brands include; Austin, CK, Ducal, Fast, Fest, Gold Mount, GR, Kiss, Magnat, Marble, Minsk, NZ, Premier, Queen and Raquel Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research

13.3% 15.0%9.5% 6.4% 10.2% 8.6%

18.6% 10.9%9.7%

9.8%7.8% 7.6%

7.7%7.5%

8.0%6.6% 5.5% 4.5%

7.1%

6.5%

6.0%4.8% 4.5%

3.9%

0.0%

1.2%2.7%

3.6% 5.4%6.4%

0.9%2.5%

2.8%4.9% 4.9% 5.1%

0.9%1.4% 2.3%

3.3% 4.8%

2.0%2.6% 3.1%

4.9% 4.2%1.6% 5.6% 7.4%

5.2% 3.9%0.0% 2.8% 3.1% 1.2%2.7% 3.4%1.2% 4.3% 4.5%

3.5%3.0%0.7% 1.7% 3.1% 1.4% 2.4%

0.5%0.4% 2.2%

5.3% 10.0%0.7% 3.4%4.4%

4.9%51.9%

46.7%41.5% 36.7%

31.0% 27.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Per

cent

of t

otal

Other non-PMI

Other Unspecif ied brands

Growing illicit white brands

American Legend

Jin Ling

West

Classic

Viceroy

Route 66

Winston

Pall Mall

PMI counterfeit

Other PMI

L&M

Marlboro

32



Summary of source markets and brand analysis

The share of counterfeit and contraband originating from outside the EU remained broadly stable in 2011 at 60% ■ Unspecified packs are now the largest source of illicit products from outside the EU, accounting for 11%

■ Flows from Russia and Ukraine have decreased, while Belarus has become a major source

■ Poland and the Czech Republic remain the main source markets of contraband originating from EU Member States

Consumption of Unspecified products increased rapidly to 7.0 billion cigarettes in 2011 ■ Karelia, Kaanee American International Tobacco and H.Van Landewyck were the largest suppliers of Unspecified product, representing

a combined share of 44% of the EU total in 2011

■ The growth in Unspecified products has been driven by increased consumption in the Mediterranean countries

Illicit white volumes increased to 24% of total EU counterfeit and contraband, exceeding 15 billion cigarettes in 2011

■ Whilst consumption of Classic and Jin Ling further declined in 2011, volumes of American Legend increased to 1.5 billion cigarettes due to increased penetration in France

■ A number of growing illicit white brands continued to increase in 2011, reaching a combined volume of 6.5 billion cigarettes

■ There were 18 illicit white brands with inflows greater than 200 million cigarettes in 2011

The share of counterfeit and contraband accounted for by Marlboro, Viceroy and Classic declined in 2011

■ Increased C&C levels were observed for Pall Mall, Route 66 and American Legend

■ The biggest movement in share of C&C was the continued growth of a wide range of relatively small volume illicit brands

33



Agenda

Methodology





Summary

Appendix

34



Genuine PMI product share of EU counterfeit and contraband consumption declined to 20.7% in 2011

PMI share of C&C consumption, 2006-2011(1)


33.3%27.3% 22.8% 23.5% 20.7%

6.5%6.0%

4.8% 4.5%3.9%

60.2%66.7%

72.4% 71.9% 75.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

Per

cent

of t

otal

Non PMI

PMI counterfeit

PMI contraband

35



Consumption of counterfeit of PMI products declined to 2.6 billion cigarettes in 2011

Consumption of counterfeit of PMI products, 2006-2011(1)


3.63.1 2.8

1.91.3 1.0

0.30.8

0.8

1.01.4

1.3

0.0 0.1

0.1

0.1 0.10.1

0.0 0.1

0.1

4.0 3.93.7

2.9 2.92.6

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011

Vol

ume

(bn

ciga

rette

s)

OthersChesterfieldL&MMarlboro

36



Germany, France and Italy were the largest destination markets for counterfeit PMI products

2009 2010

Consumption of counterfeit versions of PMI brands, 2009-2011(1)

Key: Less than 200 million cigarettes 200 to 400 million cigarettes More than 400 million cigarettes


2011

37



Summary of PMI counterfeit & contraband levels

Genuine PMI product share of counterfeit and contraband continued to decline, reaching 20.7% in 2011

■ The share of C&C consumption accounted for by counterfeit of PMI brands also declined, down to 3.9% in 2011.

Consumption of counterfeit PMI products declined to 2.6 billion cigarettes in 2011 ■ The volume of counterfeit Marlboro declined from 1.3 billion cigarettes in 2010 to 1.0 billion in 2011.

■ Counterfeit L&M declined by 0.1 billion cigarettes to 1.3 billion in 2011.

Germany, France and Italy were the largest destination markets for counterfeit PMI products

■ Germany remained the biggest destination market for counterfeit PMI products in 2011.

38



Agenda

Methodology





Summary

Appendix

39



Summary

EU cigarette consumption fell by 3.1% in 2011

Despite this, the volume of counterfeit and contraband increased to 65.3 billion cigarettes; equivalent to 10.4% of total consumption

Rapid growth in counterfeit and contraband consumption has been most apparent in Mediterranean countries, in particular in Spain and Greece

In 2011, counterfeit and contraband share of consumption in Eastern border countries declined to close to 2009 levels, whilst Latvia, Lithuania and Bulgaria remained the countries with the highest illicit levels in the EU

Counterfeit and contraband volumes increased slightly in the Western and Central EU countries in 2011, driven by France and Germany

Illicit white brands increased to 24% of counterfeit and contraband volumes driven by a large number of growing brands and Unspecified variants

Consumption of Unspecified variants increased rapidly to 7.0 billion cigarettes

PMI share of counterfeit and contraband in the EU declined to 20.7%

40



Agenda

Methodology





Summary

Appendix

41



1© 2011 KPMG LLP, a United Kingdom LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

DRAFT FOR DISCUSSION PURPOSES ONLY

FranceTotal non-domestic consumption

Consumption of non-domestic cigarettes increased to 13.53 billion cigarettes in 2010, compared to 12.49 billion in the previous year.

Non-domestic inflows of Marlboro increased from 1.91bn cigarettes in 2009 to 3.28bn in 2010.

Total non-domestic inflows (ND(L) and C&C) by origin2006-2010(1)(2)

Total inflows (ND(L) and C&C) by brand2006-2010(1)(2)

Note: (a) High level analysis of the Swiss empty pack survey results indicate outflows from France to Switzerland. However, Switzerland is not covered within the scope of Project Star and therefore it is not possible for KPMG to reliably estimate the volume of these outflows. Furthermore, as cigarette prices in France are more expensive than in Switzerland, any outflows are likely to be incidental and/or driven by inbound tourism.

Sources: (1) KPMG EU Flows Model and interviews with PMI Local Management(2) AC Nielsen ND(L) research, 2006-2010

Total France consumption

Billion cigarettes 2006 2007 2008 2009 2010Legal domestic sales (LDS) 55.77 54.95 53.59 54.99 54.80Outflows -0.91 -1.32 -0.92 -0.61 -0.68Legal domestic consumption (LDC) 54.86 53.63 52.67 54.38 54.11

Non-domestic legal (ND(L)) 7.66 5.29 4.74 3.29 4.24Counterfeit and contraband (C&C) 8.45 10.04 11.55 9.20 9.29Total non-domestic 16.11 15.33 16.29 12.49 13.53

Total consumption 70.97 68.95 68.96 66.86 67.64

Outflows from France

Billion cigarettes 2006 2007 2008 2009 2010Netherlands 0.37 0.35 0.12 0.08 0.35Italy 0.02 0.00 0.05 0.04 0.10Belgium 0.07 0.15 0.03 0.16 0.07UK 0.16 0.38 0.28 0.14 0.05Other EU 0.30 0.43 0.45 0.18 0.11Total outflows 0.91 1.32 0.92 0.61 0.68

3.44 4.36 3.23 1.91 3.28 0.00

0.43 0.98 1.86 0.79 0.85

1.22 0.93 0.47 0.76 0.000.13 0.32

0.10 0.69

10.07 8.65 9.49

7.67 7.84

1.74 0.54 1.34

0.48 0.16

16.11 15.33 16.29

12.49 13.53

02468

1012141618

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s)

PMI counterfeit

Others

Pall Mall

Camel

American Legend

Marlboro

2.84 2.87 4.04 2.20 3.70

3.42 3.254.38

2.402.08

0.00 0.260.41

0.801.001.00 0.95

0.86

0.580.52

7.10 7.455.25

6.046.06

1.74 0.54 1.34

0.480.16

16.11 15.33 16.29

12.4913.53

02468

101214161820

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s) PMI counterfeit

Other countries

Luxembourg

Algeria

Spain

Duty Free

(1)(a)

(1)(2)



FranceNon-domestic (legal) breakdown

Non-domestic (legal) inflows increased to 4.24 billion cigarettes in 2010.

Non-domestic (legal) by origin2006-2010(1)(2)(3)

Non-domestic (legal) by brand2006-2010(1)(2)(3)

Sources: (1) KPMG EU Flows Model(2) AC Nielsen ND(L) research, 2006-2010(3) Interviews with PMI Local Management

49.6m

3

Values 2010

EU rank2010

32% 5.0 146 4.24x x =

8 4 13 2

Propensity to purchase

Ave. no. of trips

Ave. purchases (cigarettes)

Total ND(L) (cigarettes)

ND(L) analysis

37%x x

18

Population19+

Propensity to travel

2 3 41

ND(L) share of consumption:

11% 8% 7% 5% 6%

ND(L) share of ND: 48% 34% 29% 26% 31%

PMI share of ND(L) 44% 42% 49% 60% 40%

ND(L) analysis: 2007-2010

2007 2008 2009 2010Propensity to travel and purchase cigarettes 8.9% 12.8% 12.2% 11.9%Average annual cigarettes purchased 1,033 646 504 729 3 4

21

xx

■ “Other Non-PMI” brands include 0.15 billion John Player Special, 0.11 billion Lucky Strike and 0.11 billion Peter Stuyvesant cigarettes.

2.29 1.84 1.62 1.04 1.12

1.671.02 0.94

0.63 0.71

0.50

0.400.18

0.13 0.50

0.53

0.730.71

0.480.43

2.66

1.301.29

1.021.48

7.66

5.294.74

3.294.24

0

2

4

6

8

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s) Other countries

Belgium

Luxembourg

Duty Free

Spain

2.891.98 2.05 1.64 1.48

0.20

0.13 0.180.05 0.10

0.28

0.09 0.110.27 0.10

0.79

0.70 0.400.45

0.31

0.00

0.18 0.230.20 0.29

3.49

2.211.76

0.691.95

7.66

5.294.74

3.29

4.24

0

2

4

6

8

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s) Other Non-PMI

Gauloises

Camel

Other PMI

Philip Morris

Marlboro



FranceTotal non-domestic consumption

Consumption of non-domestic cigarettes increased to 13.53 billion cigarettes in 2010, compared to 12.49 billion in the previous year.

Non-domestic inflows of Marlboro increased from 1.91bn cigarettes in 2009 to 3.28bn in 2010.

Total non-domestic inflows (ND(L) and C&C) by origin2006-2010(1)(2)

Total inflows (ND(L) and C&C) by brand2006-2010(1)(2)

Note: (a) High level analysis of the Swiss empty pack survey results indicate outflows from France to Switzerland. However, Switzerland is not covered within the scope of Project Star and therefore it is not possible for KPMG to reliably estimate the volume of these outflows. Furthermore, as cigarette prices in France are more expensive than in Switzerland, any outflows are likely to be incidental and/or driven by inbound tourism.

Sources: (1) KPMG EU Flows Model and interviews with PMI Local Management(2) AC Nielsen ND(L) research, 2006-2010

Total France consumption

Billion cigarettes 2006 2007 2008 2009 2010Legal domestic sales (LDS) 55.77 54.95 53.59 54.99 54.80Outflows -0.91 -1.32 -0.92 -0.61 -0.68Legal domestic consumption (LDC) 54.86 53.63 52.67 54.38 54.11

Non-domestic legal (ND(L)) 7.66 5.29 4.74 3.29 4.24Counterfeit and contraband (C&C) 8.45 10.04 11.55 9.20 9.29Total non-domestic 16.11 15.33 16.29 12.49 13.53

Total consumption 70.97 68.95 68.96 66.86 67.64

Outflows from France

Billion cigarettes 2006 2007 2008 2009 2010Netherlands 0.37 0.35 0.12 0.08 0.35Italy 0.02 0.00 0.05 0.04 0.10Belgium 0.07 0.15 0.03 0.16 0.07UK 0.16 0.38 0.28 0.14 0.05Other EU 0.30 0.43 0.45 0.18 0.11Total outflows 0.91 1.32 0.92 0.61 0.68

3.44 4.36 3.23 1.91 3.28 0.00

0.43 0.98 1.86 0.79 0.85

1.22 0.93 0.47 0.76 0.000.13 0.32

0.10 0.69

10.07 8.65 9.49

7.67 7.84

1.74 0.54 1.34

0.48 0.16

16.11 15.33 16.29

12.49 13.53

02468

1012141618

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s)

PMI counterfeit

Others

Pall Mall

Camel

American Legend

Marlboro

2.84 2.87 4.04 2.20 3.70

3.42 3.254.38

2.402.08

0.00 0.260.41

0.801.001.00 0.95

0.86

0.580.52

7.10 7.455.25

6.046.06

1.74 0.54 1.34

0.480.16

16.11 15.33 16.29

12.4913.53

02468

101214161820

2006 2007 2008 2009 2010

Volu

me

(bn

ciga

rette

s) PMI counterfeit

Other countries

Luxembourg

Algeria

Spain

Duty Free

(1)(a)

(1)(2)

Individual country results

Copies of both this presentation and individual country results for 2011 are available for your collection after this meeting

Country results follow a similar structure to previous years and will provide an overview of the total consumption and legal sales trends and detail of both the counterfeit and contraband and non-domestic (legal) results



FranceMarket overview

The share of cigarette consumption in France accounted for by counterfeit and contraband declined by 0.1 percentage points to 13.7% in 2010.

Marlboro 2010 price comparison in Euros and percentage change from 2009(1)(3)(a)(b)(c)

Share of France consumption by type2006-2010(1)(2)

Key: France Top five source countries

Note: (a) Map shows flows of over 1% of consumption. Countries which are both source and destination countries are coded according to the larger flow

(b) Based on a pack of 20 Marlboro King Size as at July 1st 2009 and 2010(c) Arrow size indicates relative cigarette flow volume

Sources: (1) KPMG EU Flows Model and interviews with PMI Local Management(2) AC Nielsen ND(L) research, 2006-2010(3) Marlboro retail selling price supplied by PMI, based on PMI standard exchange rates

as at June 2009 and June 2010

Proportions of total EU levels, 2010(1)(2)

Volume (bn cigarettes) 71.0 69.0 69.0 66.9 67.6

-1.3% -1.9% -1.3% -0.9% -1.0%

77.3% 77.8% 76.4% 81.3% 80.0%

10.8% 7.7% 6.9% 4.9% 6.3%11.9% 14.6% 16.7% 13.8% 13.7%

-20%

0

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010

Shar

e of

tota

l con

sum

ptio

n

C&C

ND(L)

LDC

Outflows

€5.60

€3.8511.6%

€3.705.7%

€4.205.0%

€4.954.4%

€1.4611.0%

20.0%

6.3%

13.7%

0.2% 1.0%

13.5%

3.7%

9.9%

0.4%

5.3%

0%

5%

10%

15%

20%

25%

ND ND(L) C&C PMI CF Outflows

Shar

e of

tota

l con

sum

ptio

n (%

)

France

EU 27 total



Country Market overview

The share of cigarette consumption in Country accounted for by counterfeit and contraband declined by 0.1 percentage points to 13.7% in 2010.

Marlboro 2010 price comparison in Euros and percentage change from 2009(1)(3)(a)(b)(c)

Share of Countryconsumption by type2006-2010(1)(2)

Key: Country Top five source countries

Note: (a) Map shows flows of over 1% of consumption. Countries which are both source and destination countries are coded according to the larger flow

(b) Based on a pack of 20 Marlboro King Size as at July 1st 2009 and 2010(c) Arrow size indicates relative cigarette flow volume

Sources: (1) KPMG EU Flows Model and interviews with PMI Local Management(2) AC Nielsen ND(L) research, 2006-2010(3) Marlboro retail selling price supplied by PMI, based on PMI standard exchange rates

as at June 2009 and June 2010

Proportions of total EU levels, 2010(1)(2)

Volume (bn cigarettes) 71.0 69.0 69.0 66.9 67.6

-1.3% -1.9% -1.3% -0.9% -1.0%

77.3% 77.8% 76.4% 81.3% 80.0%

10.8% 7.7% 6.9% 4.9% 6.3%11.9% 14.6% 16.7% 13.8% 13.7%

-20%

0

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010

Shar

e of

tota

l con

sum

ptio

n

C&C

ND(L)

LDC

Outflows

20.0%

6.3%

13.7%

0.2% 1.0%

13.5%

3.7%

9.9%

0.4%

5.3%

0%

5%

10%

15%

20%

25%

ND ND(L) C&C PMI CF Outflows

Shar

e of

tota

l con

sum

ptio

n (%

)

France

EU 27 total


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