Driving Shareholder Value
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EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D AREHOL AREHOL OurH FocusDE on Driving H DE S R S R G V G V IN A IN A V L V apprOximately L I U I U R E R E ShareholderD Value D milli440On kilOgramS Begins Here… OF tOBaccO purcHaSeD in 2011 in the fields from which we source our tobacco leaf. In 2011 we purchased approximately 440 million kilograms of packed tobacco leaf. Our largest sources of supply are: Brazil and the United States for Virginia EHO EHO and BurleyHAR tobaccos;LD Indonesia, mostly for use in our local kretek brands; HAR LD S ER S ER G V G V ArgentinaIN and Malawi Afor Burley; and Turkey and Greece for Oriental tobacco.IN A V L V L I U I U R E R E WhileD we do not grow tobacco ourselves, we do directly contract farmers forD 32% - 36% of our worldwide tobacco needs depending on the pattern of our leaf purchases. This vertical integration represents the foundation of the quality and efficiency of our agricultural processes, as well as the sustainability of our Good Agricultural Practices (GAP). Implementation of our GAP guidelines is compulsory for all our tobacco suppliers and includes labor policies preventing child labor or forced labor. In addition, we are funding programs around the globe, in cooperation with governments, non-governmental organizations, and other stakeholders, to eradicate child labor in tobacco-growing communities. Our programs focus on eliminating the root causes of child labor by improving the quality and accessibility of education for children of tobacco farmers, as well as living conditions in tobacco-growing commu- nities. To this end, in 2011 we initiated the rollout of our Agricultural Labor Practices code to improve conditions for workers on farms where tobacco is purchased for PMI products. The code was developed in association with Verité, a non-profit organi- zation that promotes fair labor practices. We have begun to implement the code’s principal provisions in several selected countries on a project-by-project basis and, together with our leaf suppliers, plan to reach an estimated 500,000 farmers in 2012. 4 …Supported by World-Class Manufacturing in a Safe and Sustainable environment EFFICIENT MANufactuRING ENvironmental Sustainability AND SAFETy We operate 56 production centers in 35 countries, ranging from highly automated As the leading international cigarette facilities, as in Bergen-op-Zoom in company, we also aim to be an industry the Netherlands and BerlinEH inO Germany, leader in environmental sustainability EHO HAR LD HAR LD S ER S ER to our hand-rolled cigarette facilities in and safety. Reducing our impact on the G V G V IN A IN A Indonesia. OurV ongoing focus is on per-L environment in a sustainable manner and V L I U I U R R formance and continuous improvement,E protecting our workforce are not only the E D D with an emphasis on the quality of pro- right things to do, but may also contribute $ duction to meet both regulatory require- positively to our future business perfor- MILLIo300N TARGeT FoR ments and adult smoker preferences. In mance. For example, we recognize that GRoSS PRoDuCTIVITy 2011 we exceeded our one-year gross climate change is a key concern. In 2010 AND CoST Savings IN 2012 productivity and cost savings target of we set ourselves the goal of reducing CO2 $250 million, predominantly driven by im- emissions, energy consumption, waste provements made in our factories. These and water in our manufacturing facilities included product blend and specification by 20% by 2015. Similarly, we are com- rationalization and streamlining of our mitted to reducing our overall company manufacturing processes. carbon footprint by 30% by 2020. EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D 5 …Leading-edge Research & Development and Innovative Product Development One of the top priorities of our research EHO EHO HAR LD HAR LD S ER efforts is the development S of a portfolioE R G V G V IN A of innovative Next GenerationIN Prod- A V L V L I U ucts (NGPs) that haveI the potential U R E R E D to reduce the risk ofD smoking-related EHO EHO diseases in comparison to conventional HAR LD HAR LD S ER S ER cigarettes. For developing and assess- G V G V IN A IN A V L V L ing these products, we are capitalizing I U I U R E R E on our team of world-class scientists D D from a broad spectrum of scientific disciplines in our state-of-the-art R&D facilities. In 2011 we further enhanced our product development capabilities by acquiring the global patent rights to EHO EHO HAR LD a new technology employingHA Ra uniqueLD S ER S ER G V method of delivering aG nicotine-contain- V IN A IN A V L ing aerosol. Prior to Vcommercialization, L I U I U R R E we are employing rigorous scientific E D D methodologies to evaluate and sub- EHO EHO HAR LD HAR LD stantiate the ability of these products to S ER S ER G V G V reduce the individual risk of smoking- IN A IN A V L V L I U I U related diseases, compared to conven- R R E E tional tobacco products, as well as their D D impact on the population as a whole. EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R E R E D D EHO EHO HAR LD HAR LD BILLI8.2oN uNITS oF S ER S ER G V G V CAPSuLe PRoDuCT IN MoRe THAN A IN A V L V L SHIPPeD IN 2011 I U I U R E R E D D NeW220 oR ReDeSIGNeD MARLBORO BRAND VARIANTS IN 2011 EHO EHO HAR LD HAR LD S ER S ER G V G V IN A IN A V L V L I U I U R R E Our product development is about smokerE preference to personally adapt, for the first time in 2011 with the launch D D understanding — and responding to — adjust or changeEH Othe product when of Marlboro Beyond, highlighted later EHO HAR LD HAR LD adult smoker preferences. The process desired. S In turn, this hasER translated into in this Report, in selected markets in S ER G V G V begins with focused market research the commercializationIN of aA new hybrid our European union Region, and L&M IN A V L V L I U I U that results in a rigorous assessment of product:R a regular cigarette that converts Forward in Finland and Poland. These R E E the challenges faced by our brands and intoD a menthol product when the capsule brand variants now complement our D the most consumer-relevant solutions. within its filter is crushed by the smoker. existing menthol-to-menthol capsule This insight then drives the development Probably the most innovative addition to brands, such as Marlboro Ice Blast, of innovative product concepts. One our portfolio in recent years, the hybrid which are enjoying considerable suc- such concept addresses a growing adult concept was successfully introduced cess in Asia and Latin America. 6 …Integrated, Agile Supply Chain Management EHO EHO HAR LD HAR LD S ER S ER G V G V PMI’s supply chain management serves demonstration of our agile supply chain IN A IN A V L V L I APPRoximateLy U I U as a cornerstone of our overall success. infrastructure was in support of our R E R E The challenge of organizing the enor- production ramp-up for Japan. This D D mous quantity of materials and supplies involved the accelerated supply of required for our business is significant. significant quantities of raw materials, BILLI16.4oN CIGAReTTeS For example, in 2011 we shipped ap- the activation of 11 factories, six of AIR-FReIGHTeD To proximately 120,000 containers around which had never manufactured product japan IN 2011 the world which, if stacked length-wise for Japan, and the air freight of more one on top of the other, would stand than 16 billion cigarettes involving higher than the equivalent of 900 Eiffel 222 charter flights and 848 commercial Towers. We also transported close to flights. The entire operation was a key 2.5 million standard shipping pallets in factor to our exiting 2011 with a fourth- EHO EHO 2011. Lined up end-to-end, they would quarter share of 28.2%, up nearly four HAR LD HAR LD S ER S ER represent a distance equal to the length share points compared to a full-year G V G V IN A IN A V L V L of Greenland.