Domestic Tobacco
At Philip Morris USA (PM USA), we witnessed compelling evidence of a sustained turnaround in the business after necessary shifts in strategy were made under Mike Szymanczyk, PM USA's Chairman and Chief Executive Officer, who has led his team during a period of extraordinary challenges. For the year, as anticipated, due primarily to lower volume and significantly increased investments to narrow price gaps, PM USA’s operating companies income declined 22.4% to $3.9 billion. However, volume stabilized and retail market share improved significantly for Marlboro and Parliament. In the fourth quarter, PM USA achieved an impressive retail market share of 49.1%, and operating companies income increased more than 25%, providing strong momentum as PM USA entered 2004. As the economy recovers, I believe that PM USA is in a position to achieve moderate retail share gains, and improve its operating companies income performance in the low single digits in 2004. Innovation is an important element in PM USA’s value equation. It introduced several new Marlboro products, (described more fully in the Business Review), and continued to support its other focus brands, Parliament, Virginia Slims and Basic, with new products and packaging. PM USA also continued, along with Philip Morris International, to develop and scientifically evaluate products that could provide reduced exposure to harmful compounds in cigarette smoke, and hopes to test-market a potentially reduced-exposure product in 2004.
International Tobacco
Philip Morris International (PMI) delivered strong operating companies income growth of 10.9%, to $6.3 billion in 2003, aided by favorable currency. However, PMI’s volume growth of 1.8% in 2003 fell short of its 3% target for the year, as gains in many markets and acquisition volume were partially offset by declines in France, Germany and Italy. I am confident that the team led by André Calantzopoulos, PMI’s President and Chief Executive Officer, has the right strategies in place to address the issues in these three markets, and that PMI should be able to achieve double-digit operating companies income growth in 2004, assuming current exchange rates hold, and 5% volume growth, including acquisitions. PMI continues to innovate and invest in the industry’s strongest segments, including American-blend, low-tar and menthol cigarettes. Importantly, its share of those segments is higher than its share of the total worldwide market. PMI’s marketing strategy is built on an outstanding international brand portfolio led by Marlboro, which is the clear leader among global cigarette brands. PMI is strengthening Marlboro by investing in equity-building initiatives, and Marlboro’s share is growing in many key markets. L&M, now the third-best-selling cigarette brand outside the U.S., increased volume 17% in 2003. PMI’s other global brands with good growth potential include Chesterfield and Lark, as well as a roster of strong local brands.
While PMI will continue to grow organically and through acquisitions, one of its greatest long-term opportunities is China, a market of about 1.8 trillion cigarettes, or roughly one third of the world’s cigarette consumption. PMI is working to achieve wider distribution of Marlboro as the retail sector is liberalized in 2004. |  | 
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