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2013 Annual Report Consolidated Results

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2013 Annual Report Consolidated Results 2013 Annual Report Consolidated Results (in millions of dollars, except per share data) 2013 2012 (1) Net revenues $80,029 $77,393 Cost of sales 10,410 10,373 Excise taxes on products 48,812 46,016 Gross profit 20,807 21,004 Operating income 13,515 13,863 Net earnings attributable to PMI 8,576 8,800 Basic earnings per share 5.26 5.17 Diluted earnings per share 5.26 5.17 Cash dividends declared per share 3.58 3.24 Summary Results By Business Segment Cigarette Shipment Reported Net Reported Operating European Volume Revenues* Companies Income (2) Union (Billion Units) ($ Millions) ($ Millions) 2013 2012 2013 2012 2013 2012 185.1 198.0 8,596 8,526 4,238 4,187 Cigarette Shipment Reported Net Reported Operating E a s t e r n E urope, Volume Revenues* Companies Income (2) Middle East (Billion Units) ($ Millions) ($ Millions) & Africa 2013 2012 2013 2012 2013 2012 296.5 303.8 8,766 8,332 3,779 3,726 Asia Cigarette Shipment Reported Net Reported Operating Volume Revenues* Companies Income (2) (Billion Units) ($ Millions) ($ Millions) 2013 2012 2013 2012 2013 2012 301.3 326.6 10,501 11,198 4,622 5,197 Cigarette Shipment Reported Net Reported Operating Latin America Volume Revenues* Companies Income (2) & Canada (Billion Units) ($ Millions) ($ Millions) 2013 2012 2013 2012 2013 2012 97.3 98.6 3,354 3,321 1,134 1,043 * Excludes excise taxes on products. (1) Certain amounts have been reclassified to conform with the current year’s presentation due to the separate disclosure of equity (income)/loss in unconsolidated subsidiaries, net. (2) PMI’s management evaluates segment performance and allocates resources based on operating companies income, which PMI defines as operating income, excluding general corporate expenses and amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. Contents 1 Letter to Shareholders 8 Board of Directors & Company Management 4 Marlboro: The World’s Favorite Cigarette Brand 9 Financial Review 5 Profitable Business Development 78 Reconciliation of Non-GAAP Measures 6 Reduced-Risk Products 80 Comparison of Cumulative Total Return 7 Contributions & Environmental Sustainability 81 Shareholder Information Dear Shareholder, “We delivered solid results in 2013, despite an extremely challenging operating environment, while maintaining our uncompromising commitment to invest in the long-term growth of our business.” Last year was uniquely challenging for the industry EEMA and LA&C Regions, up by 0.1 point and and for PMI. The exceptionally weak global macro- 0.4 points, respectively. Furthermore, excluding economic environment had a significant impact on China and the Philippines, Marlboro grew by 0.1 industry volume in a number of key markets. share point in the Asia Region as well. In addition Within this context, we withstood the pressures to the deployment of several innovative line well and delivered a solid financial performance. extensions last year, some of which are featured This is testament to the strength of our business later in this Report, we are ready to introduce the fundamentals – which include our strong pricing Marlboro Architecture 2.0. This new initiative will power, driven by our industry-leading brand allow the core brand variants to firmly occupy more portfolio – and our ability to overcome challenges modern and smoother-tasting territories with new with discipline and determination. packaging and cigarette construction as well as an array of digital marketing platforms. We plan 2013 Results to initiate the worldwide rollout of the Marlboro Our overall performance last year was adversely Architecture 2.0 as of the second half of 2014. impacted by specific challenges in Japan and Other major brands also fared well last year. the Philippines. Of particular note was the excellent performance In Japan, we endured sustained competitive of above premium Parliament, which grew volume André Calantzopoulos activities throughout the year that eroded our by 2.9% versus 2012, and below premium L&M, Chief Executive Officer market share. We fully intend to address the which grew volume by 1.4% over the same period. situation through a planned pipeline of strong Both brands benefited from the deployment of portfolio initiatives and increased marketing packaging upgrades and the launch of several investment and expect that our share should innovative products, including the industry’s first- stabilize during 2014. ever Recessed Filter capsule product, Parliament In the Philippines, we faced truly exceptional Hybrid, in Korea. circumstances following an excise tax increase To support our brand portfolio, we continued of unprecedented magnitude in January 2013. to deploy a wide range of innovative adult consum- We believe that, by the end of last year, our main er and trade engagement tools adapted to modern local competitor was still producing approximately mobile channels. Last year, 37 markets had active double the volume that it was declaring for excise pilot commercial programs in place, many of which tax purposes, thereby subsidizing an artificially contributed to significant increases in market share low price for its portfolio that, in turn, caused and strong organizational engagement. By the significant down-trading from our key brands, end of 2014, more than 45 markets – representing Marlboro and Fortune. While recent developments close to 90% of our operating companies income are encouraging, the situation is likely to remain (OCI) – are expected to have fully deployed similar uncertain for much of 2014. Our focus going programs, which we believe should further acceler- forward will be on recovering our volume base and ate the growth momentum of our brand portfolio. re-establishing a platform for long-term growth. Cigarette volume of 880.2 billion units in Our market share performance elsewhere was 2013 declined by 5.1% versus the previous year, strong in 2013, with 23 of our top 30 income mar- driven almost exclusively by total market declines, kets registering stable or growing share, the high- notably in the EU Region, the Philippines, Russia Louis C. Camilleri est number of markets to do so since we became and Turkey, partly offset by market share gains in Chairman of the Board a public company in 2008. Our share performance the EU, EEMA and LA&C Regions. Excluding the was also strong, on an aggregate basis, with impact of the Philippines, cigarette volume gains in three of our four Regions, namely the EU, declined by 2.7% versus 2012. EEMA and LA&C, up by 0.5, 0.2 and 1.1 percent- Reported net revenues, excluding excise age points, respectively. Excluding China and the taxes, of $31.2 billion, reflecting constant currency Philippines, our market share in the Asia Region growth of 1.9% versus 2012, fell short of our mid- was down by 0.4 points, and our total international to long-term annual growth target of 4% to 6%. share was essentially flat. This shortfall was due to the most severe volume/ Within the context of our overall share mix impact in our history resulting from total performance, Marlboro was resilient, particularly market declines, which eroded a large part of our given the sizable total industry declines in a large currency-neutral $2.1 billion positive price variance number of its strongholds and down-trading across for the year – the highest price variance we have a wide range of markets. Most encouragingly, the ever achieved. brand continued to gain share in the EU Region, Adjusted OCI reached $14.1 billion, up by where it grew by 0.4 percentage points versus 3.4% on a constant currency basis versus 2012, 2012, while also achieving growth in both the but below our growth target of 6% to 8%. Pricing 1 was the key contributor to our OCI growth versus yield attractive returns. In addition, we finalized a the previous year, while the adverse volume/mix strategic framework with our former parent, Altria and higher manufacturing costs weighed on our Group, Inc., related to the commercialization of performance. certain reduced-risk products, subject to FDA We surpassed our cost savings target of $300 authorization, and e-cigarettes. million in 2013. Manufacturing and procurement- related savings helped offset increases in tobacco The Fiscal, Regulatory and leaf and clove costs. In February this year, we Illicit Trade Environment announced a new annual productivity target of a Our record-high pricing variance in 2013 reflects further $300 million. not only the strength of our brand portfolio but also Adjusted diluted earnings per share (EPS) the broadly rational excise tax environment that reached $5.40, up by 3.4% versus 2012 and by prevails internationally. Overall, we did not face 2011-2013 Total Six Consecutive 10.0% on a constant currency basis, within our any disruptive excise tax increase around the world Shareholder Dividend Increases mid- to long-term growth target of 10% to 12%. – with the obvious exception of the Philippines. Return – US$ Since the Spin-Off Currency negatively impacted adjusted diluted Importantly, an increasing number of governments EPS growth by $0.34 per share, representing a have now implemented multi-year excise tax plans +104.3% significant headwind. that increase predictability. We also continued to Free cash flow of $8.9 billion was up by $570 see improved and more effective tax structures ● million versus 2012, mainly driven by improve- through high specific-to-total tax ratios, as well ments in working capital. Excluding the impact of as higher levels of minimum excise tax yields. 67.7% unfavorable currency, our free cash flow grew by Despite this good progress, certain key markets $3.76 $990 million or 11.8% versus 2012. still maintain high ad-valorem regimes and thus 56.8% We successfully completed a number of capital remain a priority for change.
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