2004 compared with 2003
The following discussion compares tobacco operating results for 2004 with 2003.
 Domestic tobacco: PM USA’s net revenues, which include excise taxes billed to customers, increased $510 million (3.0%). Excluding excise taxes, net revenues increased $514 million (3.9%), due primarily to savings resulting from changes to the 2004 trade programs, including PM USA’s returned goods policy and lower Wholesale Leaders program discounts.
Operating companies income increased $516 million (13.3%), due primarily to savings resulting from changes to trade programs in 2004, including PM USA’s returned goods policy and lower Wholesale Leaders program discounts, net of increased costs including the State Settlement Agreements (aggregating $197 million), the 2003 pre-tax charges for the domestic tobacco legal settlement ($202 million), lower marketing, administration and research costs ($67 million), lower pre-tax charges for the domestic tobacco headquarters relocation ($38 million) and lower asset impairment and exit costs ($12 million).
Marketing, administration and research costs include PM USA’s cost of administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, as more fully discussed in Note 19. Principal among these factors are the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For the years ended December 31, 2004, 2003 and 2002, product liability defense costs were $268 million, $307 million and $358 million, respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. While PM USA does not expect that product liability defense costs will increase significantly in the future, it is possible that adverse developments among the factors discussed above could have a material adverse effect on PM USA’s operating companies income.
PM USA’s shipment volume was 187.1 billion units, a decrease of 0.1%. In the premium segment, PM USA’s shipment volume increased 0.1%, as gains in Marlboro were essentially offset by declines in other premium brands. Marlboro shipment volume increased 2.5 billion units (1.7%) to 150.4 billion units with gains across the brand portfolio and the introduction of Marlboro Menthol 72 mm. In the discount segment, PM USA’s shipment volume decreased 1.9%, while Basic shipment volume was down 0.7% to 15.6 billion units.
The following table summarizes PM USA’s retail share performance, based on data from the IRI/Capstone Total Retail Panel, which was developed to measure market share in retail stores selling cigarettes, but was not designed to capture Internet or direct mail sales:
|
 |
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For the Years Ended December 31, |
|
2004 |
|
|
|
2003 |
|
|
|
Marlboro |
|
39.5 |
% |
|
|
38.0 |
% |
|
Parliament |
|
1.7 |
|
|
|
1.7 |
|
|
Virginia Slims |
|
2.4 |
|
|
|
2.4 |
|
|
Basic |
|
4.2 |
|
|
|
4.2 |
|
|
|
Focus on Four Brands |
|
47.8 |
|
|
|
46.3 |
|
|
Other PM USA |
|
2.0 |
|
|
|
2.4 |
|
|
|
Total PM USA |
|
49.8 |
% |
|
|
48.7 |
% |
|
PM USA reduced its wholesaler promotional allowance for its Focus on Four brands by $1.00 per carton, from $6.50 to $5.50, effective December 12, 2004. In addition, effective January 16, 2005, the price of PM USA’s other brands was increased by $5.00 per thousand cigarettes or $1.00 per carton.
PM USA cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM USA’s shipments or retail market share; however, it believes that PM USA’s results may be materially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by the other items discussed under the caption Tobacco—Business Environment.
International tobacco: International tobacco net revenues, which include excise taxes billed to customers, increased $6.1 billion (18.4%). Excluding excise taxes, net revenues increased $1.6 billion (10.2%), due primarily to favorable currency ($1.0 billion), price increases ($538 million) and the impact of acquisitions ($285 million), partially offset by lower volume/mix ($300 million), reflecting lower volume in France, Germany and Italy.
Operating companies income increased $280 million (4.5%), due primarily to favorable currency ($540 million), price increases ($538 million) and the impact of acquisitions ($71 million), partially offset by higher marketing, administration and research costs ($373 million), the 2004 pre-tax charges for the international tobacco E.C. agreement ($250 million), unfavorable volume/mix ($201 million), reflecting lower volume in the higher margin markets of France, Germany and Italy, and asset impairment and exit costs for the closures of facilities in Hungary and Belgium, as well as the streamlining of PMI’s Benelux operations ($44 million).
PMI’s volume of 761.4 billion units increased 25.6 billion units (3.5%), due primarily to incremental volume from acquisitions made during 2003. Excluding acquisition volume, shipments increased 9.1 billion units (1.2%). In Western Europe, volume declined 8.7%, due primarily to decreases in France, Germany and Italy. Shipment volume decreased 19.5% in France, due to tax-driven price increases since January 1, 2003, that continued to drive an overall market decline. PMI’s market share in France increased 0.7 share points to 39.9%. In Italy, volume decreased 6.4% and market share fell 2.6 share points to 51.5%, as PMI’s brands were adversely impacted by low-price competitive brands and a lower total market. Italy passed a minimum reference price law and implementation regulations are expected in the first quarter of 2005. In Germany, volume declined, reflecting a lower total cigarette market due mainly to tax-driven price increases and the resultant consumer shifts to low-price tobacco products, particularly tobacco portions which benefit from lower excise taxes than cigarettes. PMI entered the tobacco portions market during the second quarter of 2004 with the Marlboro and Next brands and is further expanding its capacity to manufacture these products in 2005. In Central and Eastern Europe, Middle East and Africa, volume increased due to gains in Kazakhstan, Poland, Romania, Russia, Saudi Arabia, Turkey and Ukraine, and acquisitions in Greece and Serbia, partially offset by declines in Lithuania and Hungary. In worldwide duty-free, volume increased, reflecting the global recovery in travel and a favorable comparison to the prior year, which was depressed by the effects of SARS and the Iraq war. In Asia, volume grew, due primarily to increases in Korea, Malaysia, Thailand and the Philippines. In Japan, PMI’s volume was up slightly, while the total market was down due to the adverse impact of the July 2003 tax-driven retail price increase and a lower incidence of smoking. In Latin America, volume decreased, driven mainly by declines in Argentina, partially offset by an increase in Mexico.
PMI achieved market share gains in a number of important markets, including Austria, Belgium, Egypt, France, Greece, Japan, Mexico, the Netherlands, Poland, Russia, Saudi Arabia, Spain, Turkey and Ukraine.
Volume for Marlboro declined 1.3%, as lower volume in Western Europe, mainly France and Germany, was partially offset by gains in Central Europe, Eastern Europe and Asia, including Japan. Marlboro market share increased in many important markets, including Argentina, Belgium, Japan, Mexico, Poland, Portugal, Russia, Spain, Turkey, Ukraine and the United Kingdom.
During 2004, PMI purchased a tobacco business in Finland for a cost of approximately $42 million. Also, during 2004, PMI reached an agreement to acquire Coltabaco, the largest tobacco company in Colombia, with a 48% market share. PMI expects to close the transaction in the beginning of 2005, for approximately $310 million. During 2003, PMI purchased approximately 74.2% of a tobacco business in Serbia for a cost of approximately $486 million, and in 2004, PMI increased its ownership interest to 85.2%. During 2003, PMI also purchased 99% of a tobacco business in Greece for approximately $387 million and increased its ownership interest in its affiliate in Ecuador from less than 50% to approximately 98% for a cost of $70 million. In addition, during the third quarter of 2003, PMI announced that its license agreement with Japan Tobacco Inc. for the manufacture and sale of Marlboro cigarettes in Japan will not be renewed when the current term of the agreement expires in April 2005. PMI will undertake the manufacture of Marlboro and has expanded its distribution and sales force in Japan. As a result, PMI anticipates a smooth transition and higher operating companies income from Japan in 2005.
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